1Q10 Conference Call Transcription

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1Q10 Conference Call Transcription

  1. 1. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 Operator: Good Morning. Welcome to Gafisa’s conference call for the results of the First Quarter of 2010. With us today is Mr. Wilson Amaral, Gafisa´s CE, Mr. Duílio Calciolari, Gafisa’s CFO and IR Officer and Luiz Mauricio Garcia, IR Manager. We inform you that the presentation is being recorded and all participants will be just listening to the webcall during the company’s presentation. Then, we shall initiate the Q&A session, when further information will be provided. Should you need any assistance, please dial *0. Before we begin, I would like to let you know that this teleconference will be related to the operational and financial results of Gafisa and may include statements that are not historical facts and are considered forward-looking. These forward-looking statements reflect Gafisa’s current views about future events and financial performance. The forward-looking statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from Gafisa’s expectations. And, Gafisa expressly does not undertake any duty to update forward-looking statements whether as a result of new information, future events, or otherwise. Among other things, any changes in macroeconomic policies or legislation and other operational results can affect Gafisa´s performance. So, now I would like to pass the floor to Wilson Amaral. Mr. Wilson you have the floor. Wilson Amaral, CEO Good morning and thank you for joining us on our First quarter 2010 conference call. I am joined here today by our CFO, Duilio Calciolari, and our Investor Relations Manager, Luiz Mauricio Garcia. We began and ended the first quarter on a very positive note. The strong momentum of the final quarter of 2009 carried into the first part of 2010, despite the traditional slowdown associated with the holiday period. We accomplished several very important steps that further our ability to execute on the business plan that we laid out last quarter, and, we remain confident that we will be able to comfortably achieve our goal of new launches for the year of R$ 4 to R$ 5 billion with Tenda, our affordable entry level business accounting for 40 - 45% of that number. With the completion of our successful follow-on offering at the end of March which netted us an additional R$1.02 billion, we now have over $2.1 billion in cash and cash equivalents, plus ample financing capacity to acquire more land, accelerate launches and opportunistically pursue synergistic acquisitions. Over the last quarter we have redoubled our efforts to ensure that Tenda is well- positioned to capture the opportunities afforded by the huge demand for its product and the renewed support for the growth of this segment as demonstrated by the Government’s March announcement of an additional R$ 72 billion to be dedicated through 2014 to build two million more homes. Tenda’s performance during the 1
  2. 2. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 quarter was notable with a doubling of launches from the fourth quarter of 2009, solid sales performance and enhanced sales structure productivity which contributed to improved margins overall for the consolidated Company. Looking forward, the fundamentals of our industry remain strong and despite signs of temporary increased inflationary pressure, real wages continue to grow, interest rates remain relatively low and improved unemployment rates are holding amid a backdrop of strong consumer confidence. Historically, the growth rate in financing available to housing has remained robust despite past high Selic rates, strengthening our view that this short term interest increase will not impact the sector. While the market expects the Selic to reach 11.75% by the end of 2010, it also expects it to drop back down again in 2011. With little historic correlation to the TR rate, and a combination of subsidies and financing derived from the FGTS, which is also linked to the TR rate, we believe there will be minimal impact on mortgages directed to all segments and that their availability will continue to grow. A word on the impact of inflationary pressure, which we also believe will be temporary as the Central Bank is already taking the appropriate actions to control this scenario. While we are seeing increases in labor costs, we do not expect this to impact our margins. There is room for price increases given the significant pent up demand, and in the case of the Gafisa product contracts, we are able to adjust all balances and payments in line with inflationary changes. At Tenda, our use of high tech, low labor intensive technologies such as the aluminum molds employed, and our focus on reducing the construction cycle time allows us to reduce our exposure to inflationary cost pressures in that segment. Our efficient operating platform that features three leading national brands that together serve all segments of the housing market, positions us to capture an important share of the projected 1.5 million new homes in annual demand growth. Now, let’s turn to Slide 4 so I can give you a snap shot of some of the key financial achievements of the first quarter. Sales grew by 50% as compared to the first quarter of 2009, while launches significantly outpaced last year’s first quarter at R$ 703 million, a strong indication that the global economic instability impacting Brazil last year is behind us. Contracted units sold were over 5,200. Net revenues during the quarter increased by 67% to over R$ 907 million and continues to track closely with sales. EBITDA adjusted for non-cash stock option expenses was R$168.5 million, 120% higher than the first quarter of 2009, thanks both to strong revenue growth and improved operating profitability. Our adjusted EBITDA margin for the quarter expanded to 18.6%, some 440 bps higher than in the same quarter of 2009 reflecting operational synergies in particular at Tenda. Finally, our cash position is now at over R$ 2.1 billion, which along with our ample access to lines of credit supports our plans for launching new developments of between R$ 4 – R$ 5 billion this year. 2
  3. 3. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 Turning to Slide 5, I’d like to go over some of the recent and most important developments during the quarter. Our highly successful share offering netted us R$1.02 billion and will allow the company to continue its growth trajectory through the acquisition of land, increased launch capacity and opportunistic M & A activity. We also consolidated our position in AlphaVille as agreed in our initial transaction with the founders through the acquisition of a further 20% of the company, bringing our holdings to 80%. We intend to move to 100% by the beginning of 2012. The first quarter of 2010 was the first full quarter that Tenda has been operated as a wholly-owned subsidiary of Gafisa. The results of the work that was begun last year with Tenda and this past quarter are now bearing fruit. As mentioned earlier, the Government’s continuing support for the affordable entry level sector was redoubled with its announcement of an additional R$ 72 billion to be dedicated to the goal of building an additional 2 million homes by 2012. But their commitment has not only been in the form of financing, but also in their successes in ramping up their internal capabilities to expedite the approval and processing of mortgages. The contracted volumes through April 26 under “Minha Casa Minha Vida” reached 417,814 units, indicating they are solidly on track to reach their 1 million goal by the end of this year. Slide 6 provides an update on the efficiency gains made under the federal program, Minha Casa, Minha Vida. Both Tenda and Caixa Economica Federal, the federal bank whose efficiency is central to the success of the program, have made considerable strides operationally since the program was first announced just over a year ago, and improved collaboration between the two continues to benefit Tenda. Contracted units up to April reached 84% of the entire number contracted during 2009, when Tenda contracted 6.102 units. Only in April we had the highest monthly amount since the program’s inception, when Tenda contracted 2.320 units. With a national presence and designation as a CAIXA Bank Representative in 6 regions, Gafisa’s Tenda subsidiary is well-positioned to leverage this relationship with CAIXA for continued growth in the low-income segment. Tenda has submitted close to 22 thousand units that are now under Caixa’s analysis. With the acceleration in approval of contracted units and mounting demand from homebuyers in all market segments, Gafisa continues to focus on execution. On slide 7 you can see that we completed 27 developments or phases, representing a total PSV of R$333 million during the first quarter, more than R$228 of which corresponded to projects under the Tenda brand. For full year 2010 we expect to deliver approximately 25 thousand units, being approximately 17 thousand under the Tenda brand. Moving on to Slide 8. One of Gafisa’s key competitive advantages is its high quality, diversified land bank, which has a total PSV of more than R$ 15.6 billion. Tenda’s 3
  4. 4. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 land bank, which corresponds to the entry level and affordable market segment, represents about 53% of the more than 86 thousand total potential units. About 40% of our land bank has been acquired through swaps, which requires no outlay of cash, and increases the financial attractiveness of our land bank. Importantly, having a diverse, national land bank gives the Company increased flexibility in terms of strategy and execution, as we are able to launch projects in the market and/or segments where demand is strongest. We expect to begin adding to our land bank in the coming periods as in order to support our expanded growth. Slide 9 shows the new launches and pre-sales for the first quarter, each by unit price. Total launches for the quarter exceeded R$700 million with a fairly balanced distribution between Gafisa and Tenda, which represented 44% and 42% of total launches respectively. 54% of Gafisa’s launches were for units priced above R$500 thousand while nearly 74% of Tenda’s launches were for units priced at or below R$130 thousand. In addition, more than 40% of first quarter launches came outside of the traditional markets of Rio de Janeiro and São Paulo. Pre-sales for the quarter reached over R$ 850 million, 53% higher than the first quarter 2009. The pre-sales was equivalent to 122% of first quarter launches, resulting in a reduction of inventory. The contributions of Gafisa and Tenda units to pre-sales was also quite balanced – 44% and 43% respectively. 86% of the pre-sales of Gafisa’s units were priced at or below R$500 thousand while 72% of Tenda’s pre- sales came from units priced below R$ 130 thousand. The Sao Paulo and Rio areas continue to represent a majority of pre-sales, however, areas outside these large markets are making increasingly strong contributions, and in the first quarter they comprised more than 40% of total pre sales. Turning to slide 10. Here we take a closer look at inventory and sales velocity. During the quarter we were able to continue to reduce our inventory in accordance with a strategy established in the beginning of last year. At the end of 1Q09, our total inventory of the consolidated company represented R$ 2.9 billion, and in a year’s time this amount has been reduced to about R$ 2.5 billion, thanks in part to the strong sales velocity of 25.2% achieved in the 1Q10, compared to a velocity of 16% in the 1Q09. Beginning in 2007 Gafisa established the platform to integrate three leading brands, Gafisa, AlphaVille and Tenda, building a powerful company with extensive geographic reach and substantial execution capacity. On Slide 11 we see evidence of the Company’s record of execution and consistent growth of this execution capacity. Whether one examines the number of projects under construction, the number of units under construction or completed, or the number of engineering professionals that we can rely on, it is clear that the Company has continued to expand the scope and breadth of its capabilities. We currently have 194 different projects underway throughout Brazil. Our successful performance was recognized for the second year in a row through being named as “The Largest Construction Company in Brazil” by ITCNet. 4
  5. 5. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 We had a strong first quarter and see continued robust demand throughout the remainder of the year. As we move forward, we intend to continue to capitalize on the benefits of scale, brand recognition, a diverse product portfolio, geographic reach, and a strong execution. Thank you. I’ll now turn it over to Duilio. Duilio Calciolari, CFO and IR Officer Good morning, everyone. As Wilson described, we had a successful first quarter with both improved margins and solid top line performance in launch and sales activity. Turning to slide 13, you can see that we continue to book strong. The more balanced results during the last two quarters across these different business lines is apparent when compared to the 1Q09 results that you see here, as the work that we began last year with Tenda is now taking hold. As a result, our pre-sales continue to positively affect the backlog of revenues that will be recognized in future periods as our projects are completed. At the close of the first quarter, the backlog of results to be recognized under the Percentage of Completion method was R$ 1.03 billion and our consolidated back log margin improved to 35.1%, from 34.6% in the 1Q09, and 35.2% in the 4Q09. On Slide 14, I call your attention to the dilution of our SG&A expenses against net revenues. During the quarter, improved operating efficiency overall, better integration of Tenda, and a more favorable economic climate as compared to one year ago, contributed to lower expense ratios. We are expecting further synergies to be achieved through shared back office functions and retail sales infrastructure, as well as the implementation of systems such as SAP, which was implemented some time ago at Gafisa and is expected to go live at Tenda in the third quarter. In the case of Tenda we continue to have an important challenge related to 2010 launches and land acquisition, but we believe that we have already achieve an important relative reduction in our expenses. The SG&A / Net Revenues ratio year-over-year improved by nearly 700 basis points, from 18.9% in 1Q09 to 12% in 1Q10. Slide 15 gives you visibility into our financial position. Our stronger cash position of more than R$ 2.1 billion partly reflects our recent follow-on offering in March, which generated net proceeds of more than R$ 1 billion that were received in the final days 5
  6. 6. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 of the quarter. Our cash burn rate came to R$233 million for the quarter, in line with the substantial launches, sales and construction activity at the Company. Long term debt now represents 71% of our total debt profile of approximately $3 billion, with some maturities extending through 2013. The recent offering helped us to reduce our net debt to equity ratio to 34.6%, providing us with significantly more room to fund our continued growth if needed. When excluding all the project finance debt, the net debt to equity ratio came to negative: At -14%. As you may be aware, on March 28th, the Central Bank increased the Selic rate from 8.75% to 9.5%. As we look at Slide 16, I would like to briefly mention several reasons why we are confident that the supply of credit to the real estate market will remain ample even if there are further increases to the Selic during 2010. It’s important to recall that we have witnessed consistent and steady growth of available home financing since 2005, when the annual Selic was close to 20%. It is also important to remember that mortgage rates are linked to the TR rate, which has a low historic correlation to Selic. For interest rates in general, the market is expecting the Selic rate to reach 11.75% by the end of 2010, followed by lower rates in 2011, which strengthens our view that these rate increases will be limited to the short-term to medium term and not impact growth of the sector. We raised R$1.02 billion in net proceeds through the oversubscribed follow-on equity offering at the end of March. This will allow us to comfortably fund our business objectives over the next few years as well as reinforce our capital structure. The intended use of funds remains as previously stated: Land acquisition – 35 % Working capital – 25 % Launches – 20 % M& A - 20 % Our outlook for 2010 remains unchanged as we continue to believe that our platform that consolidates three leading national brands in different market segments positions the Company well to take advantage of a favorable economic environment. We reiterate that we expect to launch projects totaling R$ 4 billion to R$ 5 billion during 2010, of which 40-45% will be dedicated to the affordable entry-level segment through Tenda. We also continue to expect the Company’s full-year 2010 EBITDA margin to be between 18.5%- 20.5%. Our final slide provides a snapshot of our share performance and liquidity from January through April 30th, Gafisa shares continue to be the most liquid in the sector with over R$98.6 million on average traded daily and we remain the only Brazilian real estate company to be listed on the New York Stock Exchange. 6
  7. 7. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 Thank you, and let’s now open the floor to Q&A. William Wright, Signet Asset Management: Did I understand you correctly that you anticipate your sales this year would be around R$4 billion to R$5 billion, and your land bank represents potential R$15.6 billion? So, you have a land bank that would cover the next two to three years of sales? Wilson Amaral de Oliveira: Yes, exactly. This is our guidance for this year, we will launch something between R$4 billion to R$5 billion. And our policy is to maintain in our land bank the equivalents to two to three years of future sales. So during this year, we will acquire more land in order to be ready for the growth that we are expecting for the year 2011 and 2012. William Wright: May I ask you if the acquisition prices are increasing in land with the inflation in Brazil? Wilson Amaral de Oliveira: Yes, of course it depends on the region. But we are seeing some increase in prices, a little bit above inflation in the last two years. And again depending on the region, good regions like the south area of São Paulo and Rio de Janeiro, we can have more increases in prices of the land; in some regions, something around 20% to 25%, 30%. But we believe it is a sector considering that the condition that we have today in terms of mortgage in Brazil, we are still able to transfer those costs to the price of our products. That is exactly what we have been doing in the last two years in Brazil. William Wright: You do not see any possibility of the happening in Brazil would be the same as what has happened in the housing market in the United States, the terrible toxic assets that they have developed? Wilson Amaral de Oliveira: No, we do not see because, I do not know if you are aware about that, but the way we do business in Brazil is completely different from the way we do in the United States. In Brazil, let us say using an example of a product of Gafisa: we launch a product today and we start the pre-sales today and the product will be delivered in three years from now. So, before delivering the keys, we will collect something around 25% to 30% of the price of the unit. So, using this way to sell products, we do not see any possibility to have a similar phenomenon in Brazil as you had in the United States. William Wright: 7
  8. 8. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 My final question is, you mentioned that in acquiring some of your land 15% or 20%, you did not have to pay cash for it. But tell us about how you acquire land under swaps? Wilson Amaral de Oliveira: OK. Duílio, could you please cover this one? Alceu Duílio Calciolari: Yes. Basically what we have done in the last few years is for a large piece of area, we enter in swap agreements, what we call swap agreements, giving some units to the landowner, which represent the price of the land. Of course, when we are paying swap agreements, we have a premium comparing when we pay in cash. In the last few years, in the last four or five years, this kind of acquisition reduced because we had many players coming to the market with more liquidity. But basically what we have done and continue to do is changing units by land. For example, we have AlphaVille, which is a urban developer. In this company, we acquire land using 100% swap agreements because it is large piece of the area that takes a lot of time to get the approval; sometimes over four or five years. So, we continue to do the marketing, continue to do for large piece of areas; small piece of premium area is more difficult. William Wright: So, the minority interest that appears on your balance sheet is a result of these swaps? Alceu Duílio Calciolari: No. The minority is AlphaVille that in this quarter, we still have 60% of AlphaVille. We are finishing with the acquisition of 80%. So, we have AlphaVille, and also we have a transaction that we call obligation to invest investors that we are accounting as minority. So, we have R$11 million in minority shareholder, about R$4.5 million came from AlphaVille, and R$6 million came from obligation to investors, which is a third- party transaction, but that is just it. William Wright: Thank you. Adrian Huerta, JPMorgan: Hi, good morning, everyone. I wanted to ask a question on margins. I mean we saw some pressure on gross margins, which was offset by efficiencies, mainly by reducing G&A and selling expenses. I believe that a big part of your selling expenses is fixed costs. So as we see an acceleration on revenue recognition, should we think that on 8
  9. 9. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 EBITDA margins we should see EBITDA margin improving from the current levels in coming quarters? Alceu Duílio Calciolari: Hi, Adrian. Yes. Just answering your first question regarding gross margin. This quarter, Adrian, we had a special impact in our gross margin, about 120 b.p. that came from acquisition and launches that we did through swap. We launched a very premium project in Paulista Avenue, a corporate project that we acquired through swap. And I am not sure, but I think you know that we account the swap in our financial statement, in our P&L, in revenues and also in cost. So when we make the gross margin calculation, we have a negative impact reducing the gross margin, because we are increasing the net revenue, this is the way that we account. And especially in this quarter, it was 1.2% coming from this acquisition. We have another minor reduction coming from mix, but the most important impact came from this transaction. We paid in swap for this piece of land 42% in this specific transaction. Adrian Huerta: And this probably will continue to contribute to revenues and impacting gross margins in the next couple of quarters? Alceu Duílio Calciolari: Very small, but the major impact happened in the 1Q. Adrian Huerta: So, with that and then with the higher revenue recognition diluting operating expenses, again it means that we should see margins really being higher than the 1Q in the next three quarter for the year? Alceu Duílio Calciolari: You should have in mind that when we gave guidance from 18.5% to 20.5%, we expected this kind of impact in the 1Q. So, we should have some improvement along the year, but staying in the range of this 18.5% to 20.5% EBITDA margin. Adrian Huerta: Excellent, many thanks Duílio. Wilson Amaral de Oliveira: No, no I believe that Duílio already answered your question, but just to remind you that we have been talking a lot about that. Last year, on a consolidated basis we were very and severely impacted by the results coming from Tenda. Last year we delivered 9
  10. 10. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 17.5% in terms of EBITDA margin, combined 20% coming from Gafisa and AlphaVille and 13% coming from Tenda. So, what we are doing right now since the first week of this year is integrating the business with Tenda, and during this process we are going to see a lot of synergies, and that is the reason why you are seeing this strong reduction from almost 19% of SG&A to 12% of SG&A compared quarter versus quarter. So, we believe that you can expect some other synergies in the future, especially with the implementation of our SAP platform. But, as Duílio mentioned, it is going to be in our range from 18.5% to 20.5% of EBITDA margin for the whole year. Adrian Huerta: Excellent. Thank you very much, Wilson. Eliot Hayes, Laurel Grove Capital: Yes, good morning. Can you just explain a little bit more on the swap agreements? So you are giving is it future units that are developed on that land to the current landholder, so they get paid sort of once the project is developed? Alceu Duílio Calciolari: Yes. Actually, what we do, we are exchanging units completed with the land. So, when we are entering in a swap agreement, just to give an example, if you have, we are estimating a project with 100 units, we can enter in agreement giving about 20 units, 15 units in the project for the landowner at the end of the construction. So, at the end of the day, the landowner will have, instead of a piece of land, 15 or 20 units. Eliot Hayes: OK. Alceu Duílio Calciolari: So we price this based on current market price plus a premium, when comparing with cash transaction. Eliot Hayes: Right, so they get paid because there is a time it takes to develop, so they get the premium as an interest, basically interest on their asset. The other question was, I hope you do not mind, but on the Minha Casa, Minha Vida program, can you talk a little bit about what the most important element of that is in terms of making housing more affordable. Is it the interest rate, is it just real quick overview for a foreign investor? Wilson Amaral de Oliveira: 10
  11. 11. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 Hi, Laurel. In fact, I believe that the success of this Minha Casa, Minha Vida plan is exactly because we put together the most important drivers to provide the right mortgage in Brazil. It is a combination. First, the interest rate; and this is easy to understand. Considering that we had in Brazil something around 9% of basic interest rate and that the family that is buying an apartment through the Minha Casa, Minha Vida plan is paying something between 4.5% and 8% in terms of interest rate. So, there is a very important subsidy here in terms of interest rate, and this is possible because of the FGTS, which is a fund that was created in Brazil in 1964, and through this fund we have the right funding to the sector. So interest rates are very important. The other part, which is also important, is the subsidies that the Government is providing for the lower income families in Brazil. So, a family that makes between 0 to 5 minimum wages will get a very important subsidy, and in some cases can represent something around 20% of the price of the unit. So when you combine the subsidy plus a very low interest rate for Brazil, and another 30 years mortgage and some other insurance that was created in order to, let us say, allow the family in case they lose their jobs, they continue to pay the mortgage. So, when you put everything together, we have a very strong platform to provide the right mortgage in Brazil. So that is the reason why we are seeing so important volumes in terms of sales and the right velocity in terms of sales. Eliot Hayes: Oh, that sounds like a very good program. And then last question again, this is sort of a more of a financing question for the homebuyer: you were saying that you typically get 25% to 35% down payment. So, does that mean that tends to be sort of a cash down, and then they finance a completion so that the mortgages have a pretty conservative loan/value ratio to the people you are selling to, or…? Alceu Duílio Calciolari: Eliot, this is a little bit different when we are talking about the low-income and the middle to middle-high income. Eliot Hayes: Right. I was switching to the middle-high. Alceu Duílio Calciolari: OK. So, for the middle to middle-high we are collecting, during the construction phase, from the day that we launch the project until the day that we deliver the project, we are collecting from our customers about 25% to 35%. It depends if it is middle, middle-high or very-high income. If it is very-high income, we can collect even 100% of the total price of the unit. But on average it is about 30% to 35%. During this period we are collecting and they are 11
  12. 12. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 paying on a monthly basis, it is about 30 months, they are paying about 1% a month. And then when get to the day that we will deliver the keys, the customers will get the mortgage. Mortgage is about 70%, 65% loan/value. So, that is how we work here in the sector. Wilson Amaral de Oliveira: And that is the reason why the delinquency in Brazil is so small, just because of that. We are very conservative in terms of LTV. So that is the reason why we do not believe that we are going to see in Brazil the same or a similar process that you saw in the United States. Eliot Hayes: Absolutely. That is very conservative. It is very conservative. So I will get off now, but basically then if you get 70%, your real concern with interest rates then, since you are getting cash all along, is that just at the moment of the final sale if mortgage rates go up you might have some people that are a little bit, it is a little bit tight for them to do it, but because you have collected so much cash the incentives would be strong for them to figure out a way to do it, sounds like it. Alceu Duílio Calciolari: Elliot, we have here the rates that are used to finance the sector, they are not linked with our Selic rate. So there is very low correlation, as I mentioned in my slide, I think. If you take a look at the slides, we have a slide here, it is slide 16. You can see the correlation, I think just to have an idea what is happening in financing. Eliot Hayes: That is very helpful. Yeah. Alceu Duílio Calciolari: Even having some increase in the Selic rate, the correlation with the rates that finance the mortgage is less than 15%. And also the system here in Brazil has a limit in terms of interest rate, which is 12% plus TR. So the limit is more or less 13%, this is by law. So, considering that we have not seen this happen in the last few years, we do not see much risk that at the end of the day, the day that we are delivering the keys we have a problem with interest rate, which would impact the capacity of our homebuyer, of our clients to get a mortgage. Eliot Hayes: Got it. Great. OK, thank you so much for taking my questions. Jim Gulbrandsen, Geriba: 12
  13. 13. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 Hi guys, really quick question, and good to talk with you again, but really quick question on future financing. We know your cash level is about R$2 billion right now, after the recent equity offering. Where are you in terms of future cash needs for your forward lançamentos or launches relative to current cash? That is my first question, then I have a follow up. Alceu Duílio Calciolari: Jim, what we are expecting for 2010 in terms of leverage is get to the end with net debt/equity about 60%, which means that we should have a cash operation or a negative operational cash flow along 2010, about R$900 million. Part of this number will be invested in land acquisition. And I am not sure if you are aware, but we have a policy here in Gafisa that we should be operating at a level of 60% to 70% net debt/equity. So by the end of this year, if you have in your model the debt projection you should work with this ratio about 60%, 65% is our expectation for 2010. James Gulbrandsen: OK, very good. And a related question is free cash flow positive and when should we as investors start thinking about Gafisa becoming free cash flow positive on a more sustainable basis and not coming back to market for follow-ons and so forth? Alceu Duílio Calciolari: Well, first, we are expecting positive cash flow next year, 2011. According to our business plan we are not expecting to come back with new offering unless we have an important change in our growth, which according to our plan we are not seeing any change by now. So we should expect 2011 Gafisa intent the consolidated figures becoming positive. James Gulbrandsen: Very good. We look forward to seeing you, and thanks for taking my questions. William Wright, Signet Management: Could I ask you who supplies the mortgage financing, is it Banco do Brasil, or the other banks, or is it the Government? And second of all, what about the inflation rate of your building materials? How do you that developing? Wilson Amaral de Oliveira: OK. Well, the first question in Brazil, for the Gafisa products, the mid, mid-high, and high-end products, the major banks are providing this kind of mortgage in Brazil, including Banco do Brasil, Caixa Econômica Federal, Itaú, Bradesco, HSBC, Santander and others. Alceu Duílio Calciolari: 13
  14. 14. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 Bradesco. Wilson Amaral de Oliveira: Bradesco, all of them. When you go to the lower-income segments, Brazil still depends on Caixa Econômica Federal, I would say almost 100%. Some months ago, the Central Bank in Brazil authorized Banco do Brasil to operate in this segment but they are just starting, so Caixa Econômica Federal is key in order to have, let us say, today the right system in Brazil. I do not see the private banks, the commercial banks, coming to this segment on a short term. They know exactly what is happening in Brazil, they are monitoring this market, but I believe that maybe two to three years they can come to this market, but so far the lower-income segments in Brazil depend on Caixa Econômica. Talking a little bit about inflation, I do not know if you are aware about that, but in Brazil we have an index, the INCC, the national construction index, and this index measures what is happening in terms of inflation for the sector. And last year, this index raised to something around 3%, 3.5%. We are expecting this year something between 7% and 8%, according to our projections. In 2008, we had the highest INCC in the recent history of our Country, something around 12%. We are expecting 7% to 8% but in Brazil, when we sell our products, in fact we index the price of the unit to this index, to this INCC, which means that we are 100% protected against this inflation. In some cases, we can have a gap between this index, the INCC, and the real inflation because sometimes the INCC does not reflect our basket of costs. So this is another thing that we monitor very well every month in Brazil, but we are not expecting an important gap during this year. So this is what we expect in terms of inflation, and according to our studies here in Brazil it is pretty, let us say, manageable during this year, 2010. William Wright: OK. The final question/comment is, how do you see the election coming up is affecting your business, if at all? There has been a lot of speculation about what is going to happen with PAC, the Government taking an increased share of their revenues in equity? Wilson Amaral de Oliveira: Yeah. William Wright: Are you on a solid basis with the Government? Wilson Amaral de Oliveira: No, of course it is almost impossible to foresee what is going to happen, but we know very well both candidates in Brazil. And first, we do not expect any change in terms of 14
  15. 15. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 macroeconomic scenario, because I do not see those candidates changing what is doing so well in Brazil. I believe that we are going to see some volatility, specially between July and September in Brazil and it is normal, we are not going to see the same volatility that we saw in the first mandate of Lula, when we saw our currency devaluating almost 50% in some months; it is going to be a little bit different. But in our case, for the sector what is important to know? First, one of the candidates, who is Dilma Rousseff, created the plan. So she is the sponsor of this plan in Brazil. So, if for some reason Dilma wins the elections, it is going to be easier for us too, because we are not going to have to explain anything. The other guy, Serra, is the Governor of São Paulo, we know him very well, and he is a very competent manager and a very serious candidate. And again, he has at his side the Housing Secretary for the State of São Paulo, one of the most, let us say, important experts in this business in Brazil. His name is Lair Krahenbuhl, we know him very well. So, with the information that we have so far, we do not see any important change for our sector. We see change, but good changes for our sector in the future, as this is the sector that is really providing a very important number of jobs and a lot of taxes in Brazil. So frankly, I do not see many problems ahead for our sector in Brazil. William Wright: What is your tax rate? Wilson Amaral de Oliveira: It depends on what taxes there are. Alceu Duílio Calciolari: We have a lot of taxes. Wilson Amaral de Oliveira: We have a lot of tax rates in Brazil. Alceu Duílio Calciolari: Over GDP is about 40%. Wilson Amaral de Oliveira: It is almost 40% of our GDP, just to give you an idea. But it depends; if you talk in terms of the personal income tax in Brazil, it can go up to almost 30%, 27.5%, and if you consider the income tax for the companies it can go up 34% of our net profit, which means in our case 2.5% of our net revenue, OK? 15
  16. 16. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 William Wright: Thank you very much, and good luck. Everett Gong, Columbia Management: Yeah, I actually had a follow-up question regarding your inflation discussion. Can you just remind us, under the MCMV 2 program, how much of the inflation are you allowed to sort of pass on into the price of the homes? Wilson Amaral de Oliveira: In fact, when the Government announced the Minha Casa, Minha Vida 2, they just made the announcement in terms of the volume of subsidies. But during this month of May, they are talking with us from the sector in order to regulate this plan. So, I believe that we are going to see this information probably in 45 days from now, and we are going to have this information when the Government sends to the Congress a kind of a project of law, which is in Brazil a Medida Provisória. Probably it is going to be during the month of June, but there is a discussion today in Brazil. One of the indexes that could be used in order to adjust inflation could be the INCC, which is a very good index in Brazil. But there is another discussion about the possibility to use the minimum wages, or the increase in minimum wages to adjust the plan. So, we do not have this final authorization from the Government. But we will see that happening probably during the month of June. Everett Gong: OK. And then just another follow-up question, which is, I was curious if the home building industry in Brazil is trying to, I guess, negotiate with the Government to extend the deadline when the new accounting standards will be implemented, to sort of minimize the confusion or at least delay the confusion that that will cause as far as investors being able to project and do a financial modeling of the companies. Alceu Duílio Calciolari: Yes, you are right. We are keeping conversation with our CVM, the Brazilian SEC, and this conversation is underway and we believe that in the next maybe two months, we will have some decision. And the reality is exactly what you said, we believe that the sector should continue to be treated under the percentage completion instead of moving to delivering the keys. So, we are in the middle of this discussion and we expect to have the final decision in two months. Everett Gong: OK. Are you guys like positive, or do you just not know? Alceu Duílio Calciolari: 16
  17. 17. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 We are positive at this moment, yes. Wilson Amaral de Oliveira: We are very positive because it is a very technical situation; that is the reason why we are very positive. When you see the way we do business in Brazil, the way we sell our products, the contracts that we are signing here, there is a lot of reason to keep the PLC system in Brazil. And the Brazilian authorities are very open to talk with us and to discuss what is better for our sector, which is a very important sector in Brazil. Everett Gong: OK, great. And I am sorry, I just have one last follow-up. We have heard anecdotally about, well, some companies talk about intense competition for, I guess, a pretty small pool of engineering and real estate talent in Brazil. So, I am just curious about, are you guys worried about rising compensation costs to retain your best talent, or how do you see that going forward? Wilson Amaral de Oliveira: Yes, you know that this is very good question. And we have been having a lot of questions about that, about the execution in Brazil, because when you see this hot market, it is normal to have some, let us say, problems in terms of getting the right workforce, especially in our business; we are talking about engineers. But that is the reason I believe that we are not facing any problems because some years ago we thought about that. We knew that in the future we could have this kind of situation in Brazil because we are just beginning this game in Brazil. I know, just to give you an idea, mortgage in Brazil is something around 3% of our GDP. So this is the beginning of a process that is going to stay here for many years, for decades probably in Brazil. So, we have to be prepared for the future. So what we have been doing in Brazil, we are trying to form our teams in Brazil. So today we have on the job 484 engineers, we have another 67 construction architects, who are very important for our business. But we also have 356 other exactly the opposite, in fact we have 356 on the job and another 484 being trained. So those engineers are in the middle of their course. I will say that one and a half to two years from now they will be prepared to work for us, but that is the reason why we do not believe that we are going to see problem in order to have the right people because we are very involved with the process of training them. So, almost 500 engineers are under training; it is a lot. And that is a reason why we are very comfortable about our future, because today if we would have to go to the market to hire, let us say, 50, 100 engineers it would be impossible. So, in our view it is much more a matter of plan than any other thing, so you have to be prepared in order to avoid this kind of problem in the future. Everett Gong: 17
  18. 18. Transcript of the Conference Call for the 1Q10 Results Gafisa (GFSA3) May 4, 2010 OK. And so, when you train, I mean, do you put agreements in place to say, “OK, we provide you this training, but in return you have to commit to staying with us for, say, five years or whatever after completion”? Wilson Amaral de Oliveira: In fact, we cannot do this under the Brazilian laws, but we have been doing this for more than 20 years and usually we are able to keep something around 75% to 80% of those engineers. And it is working very well for many years in Brazil. Everett Gong: OK, great. Thanks for taking my questions. Operator: Thanks you. This concludes the question and answer session for today’s conference. I will now turn the floor back over to our hosts for any closing remarks. Wilson Amaral de Oliveira: OK. Just like to thank you again for participating in our conference call. And look forward to seeing you in our next conference. Thank you again. Alceu Duílio Calciolari: Thank you, everyone. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a great day. “This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ. Please, refer to the company’s investor relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript.” 18

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