Conference Call Transcription
2Q10
Gafisa
August 4, 2010

Operator:

Good Morning. Welcome to Gafisa’s conference call for...
Among our initiatives to improve Tenda’s execution capacity was the further standardization of building
processes and the ...
quarter adjusted EBITDA margin of 19.8%, which was over 400 basis points higher than in the 2nd
Quarter 2009.

Finally, I ...
market segment, represents about 47% of the more than 90 thousand total potential units, while
Alphaville accounts for jus...
The engineers and architects that we can rely on have been key to our expansion at Gafisa, particularly at
a time when the...
As expected, cash burn has increased as we picked up the pace of construction activities. As we deliver
more developments ...
the distribution of launches in the year of 2010 for the Tenda's products will be a little bit different from
what is our ...
Hi, good morning, everyone. First of all, congratulations for the results. I would like to understand better
the increase ...
Thank you. First of all, I wanted to say that, you guys, it is just so impressive that you are so well
positioned in Brazi...
Yeah. That is correct. That is how it happens.

Christine Hamilton:

Yeah. So that being the case, how do they sell them i...
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2Q10 Conference Call Transcription

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2Q10 Conference Call Transcription

  1. 1. Conference Call Transcription 2Q10 Gafisa August 4, 2010 Operator: Good Morning. Welcome to Gafisa’s conference call for the results of the Second 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 de Oliveira: Good morning and thank you for joining us on our second quarter 2010 conference call. I am joined here today by our CFO, Duilio Calciolari, and our Investor Relations Manager, Luiz Mauricio Garcia. During the second quarter we continued to see a very favorable market climate for residential real estate, which translated into another strong quarter in terms of sales and launches, notably in the mid to high segments of the market which we serve through Gafisa and Alphaville. At Tenda we saw solid sales results and we are on track with our launch strategy for the year. We also took a number of important measures to further enhance the operational efficiency of that business, which is key to preparing it for more aggressive sales and launch figures during the second half of the year. We remain confident that we will be able to achieve our goal of new launches for the year of R$ 4 to R$ 5 billion. Our Gafisa and Alphaville units turned in particularly strong performances, as significant demand in those segments allowed for price increases, contributing to higher margins. We saw improvements in our key operating margins as a result of both an increased top line as well as a strong focus on driving operating efficiencies, which resulted in a second quarter EBITDA margin of 19.8%, up from 15.8% one year ago. Here too, we are on track to achieve our guidance of 18.5% -20.5% EBITDA margin for the year. 1
  2. 2. Among our initiatives to improve Tenda’s execution capacity was the further standardization of building processes and the broader use of innovative aluminum molds that shorten the construction cycle and reduce our exposure to inflationary cost pressures in that segment. Another accomplishment at Tenda during the quarter was completion of the SAP enterprise software implementation, which was launched in July and will allow its business structure to operate in a more integrated, efficient manner during the second half of the year and beyond. These measures, among others, will help Tenda to meet the substantial demand evident in this segment, delivering homes more quickly at some of the lowest price points within the traded companies in the industry. Tenda’s average price points during the first half of R$ 100 thousand to R$ 110 thousand are below the limits stipulated under the Minha Casa, Minha Vida housing program, giving it a significant opportunity to capture an important share of this growing segment of the market. The prevailing expansion of real wages, record low unemployment rates which fell to 7% in June, and strong consumer confidence, contributed to a very favorable environment for our industry, and looking ahead, we expect industry fundamentals to remain strong. The central bank’s move to tighten monetary policy in order to control inflation is not expected to curtail growth of our sector, as pent-up demand from homebuyers and adequate access to credit at competitive rates should continue to drive growth. We expect this positive climate for homebuilders will prevail through the end of the year, barring any unexpected slowing to economic activity caused by the upcoming Presidential elections to be held in October. Another encouraging sign for the sector has been the performance of a range of financial institutions that supply credit necessary to sustain a high level of growth in the sector. In the affordable housing segments, Caixa Economica Federal continues to play a central role in stimulating growth through its participation in the Minha Casa, Minha Vida program, and financing from the FGTS continue to help to completely isolate the mortgage market from general interest rate increases. In addition, the great strides Caixa has made in improving the efficiency of its operations, and specifically its ability to receive and process transferred mortgages are worth noting. During the second quarter, Tenda transferred more than 2,500 mortgages, a 33% increase over the 1st Quarter. Our diversified, flexible operating platform features three leading brands that together serve all segments of the national housing market and solidly positions us to capture an important share of the estimated 1.5 to 1.8 million new homes in annual demand growth. Now, let’s turn to Slide 4 so I can go over some of the key financial achievements of the second quarter. Launches grew over last year’s second quarter by 61%, exceeding R$ 1 billion. Sales grew by 7% year- over-year and were up by 25% as compared to the first half of 2009. We expect to accelerate growth in the second half, with increased contributions from Tenda as it leverages its enhanced execution capacity and takes advantage of solid economic fundamentals expected through the end of the year. Consolidated contracted units sold in the second quarter exceeded 4,400. EBITDA adjusted for non-cash stock option expenses was R$184 million, 65% higher than in the second quarter of 2009, mainly due to improved operating profitability, reflecting the effectiveness of the company’s strategy and our successes in new projects. This improvement was also reflected in our second 2
  3. 3. quarter adjusted EBITDA margin of 19.8%, which was over 400 basis points higher than in the 2nd Quarter 2009. Finally, I note that our cash position exceeds R$ 1.8 billion. This, along with strong financial relationships and access to lines of credit, will allow us to execute our strategy of launching new developments of between R$ 4 – R$ 5 billion this year while, when appropriate, taking advantage of opportunities in the market that we believe will be accretive and generate strong returns. Turning to Slide 5, I’d like to go over some of the recent and most important developments during the quarter. Strong demand, mainly in the mid and upper middle segments, allowed us to increase prices in markets such as São Paulo while improved G&A and direct selling expenses as a percentage of net revenues also strengthened this result and drove adjusted EBITDA improvements. We were particularly active through Alphaville during the quarter, launching six projects in the southern, central and northern regions of the country which extended the geographic reach of the unit’s product offerings and strong brand name. As of the quarter’s end, Tenda was employing innovative aluminum molds in seven projects under construction, and expects to use this technology in a total of 15 projects by the end of 2010. These molds can shorten Tenda’s construction cycle by up to 1/3, and at Gafisa we are now also testing a similar, innovative technology that could reduce construction period by about 6 months. The average price per unit of Tenda is one of the lowest among Brazil’s traded homebuilders. In the first half of the year, the average launch price per unit was R$ 109 thousand while the average sales price was R$ 100 thousand, respectively 16% and 23% below the Minha Casa, Minha Vida price limit. We believe Tenda’s low price points give it a significant competitive advantage in the context of this federal program, and I will elaborate on our efficiency gains made under this program on Slide 6. Slide 6. Gafisa continues to prioritize the streamlining of its interactions with Caixa Economica Federal through our subsidiary Tenda and we see that it’s resulting in improved collaboration. We were able to contract 6,239 units in the 2Q10, an increase of 124% when compared to the first quarter, while transferring more than 2,500 mortgages during the quarter. It’s also worth noting that we transferred more than one thousand in June alone, reflecting our progress during the quarter. Through its designation as a Caixa Economica Federal Bank Representative in 6 regions, Tenda maintains a close relationship with this federal bank whose efficiency is central to the success of the Minha Casa, Minha Vida program. This close working relationship has facilitated Tenda’s submission of more than 17 thousand units that are now under Caixa’s analysis. Gafisa continues to focus on serving the demand from homebuyers in all market segments through an array of high quality residential products. On slide 7 you can see that we completed 22 developments or phases, representing a total PSV of R$631 million during the second quarter, with more than R$250 million corresponding to the Alphaville brand Slide 8. One of Gafisa’s key competitive advantages is its high quality, diversified land bank, which has a total PSV close to R$ 16 billion. Tenda’s land bank, which corresponds to the entry level and affordable 3
  4. 4. market segment, represents about 47% of the more than 90 thousand total potential units, while Alphaville accounts for just under a third of that total. Nearly 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. We currently have 198 projects in our landbank in 21 states, and expect to begin adding to our land bank in the coming periods to support our expanded growth. 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. A good illustration of this is the launching of 6 AlphaVille projects in 5 different locations during the second quarter that I mentioned earlier. Slide 9 shows the new launches and pre-sales for the second quarter, each by unit price. Consolidated launches exceeded R$1 billion, with Gafisa accounting for nearly half of the quarter’s total. 55% of Gafisa’s launches were for units priced above R$500 thousand while 75% of Tenda’s launches were for units priced at or below R$130 thousand. Less developed real estate markets, outside of the traditional markets of Rio de Janeiro and São Paulo, accounted for 47% of second quarter launches. Pre-sales for the quarter reached R$ 890 million, 7% higher than in 2nd Quarter 2009. The Gafisa segment accounted for 51% of total pre-sales, followed by Tenda and Alphaville, which accounted for approximately 34% and 15% respectively. Units priced above R$ 500 thousand made up 57% of Gafisa’s pre-sales, while 74% of Tenda’s pre-sales came from units priced below R$ 130 thousand. Markets outside the states of Sao Paulo and Rio made a solid contribution to our pre-sales, comprising more than 40% of total second quarter pre sales. Turning now to slide 10, which provides visibility into our inventory and second quarter sales velocity. At the end of 2nd Quarter 2010, our total inventory of the consolidated company represented R$ 2.7 billion. Launches exceeded sales resulting in a small increase to our inventory during the quarter, and you can also observe here that market conditions drove price increases, mainly for Gafisa units, which lifted inventory totals. We achieved a consolidated quarterly sales velocity of 24.6%, which was higher than the 23.8% witnessed during the second quarter one year ago, but down slightly on a sequential basis. We are not solely focused on sales velocity, but on ensuring that we are achieving the optimal equilibrium between sales speed and margin improvement. Gafisa pursued a strategy to integrate three leading brands -- Gafisa, AlphaVille and Tenda – and establish a diversified company with extensive geographic reach and substantial execution capacity. On Slide 11 we see evidence of the Company’s record of steady growth of the number of projects or units under construction and the number of units completed. 4
  5. 5. The engineers and architects that we can rely on have been key to our expansion at Gafisa, particularly at a time when the labor market is tighter and qualified professionals are in demand. They play an integral part of the Company’s capacity to execute and achieve overall scale, which combined with the strength of our three brands, a diverse product portfolio, national reach, make Gafisa a very competitive company as we go forward. Thank you. I’ll now turn it over to Duilio. Duilio Calciolari Good morning, everyone. As Wilson mentioned, we were pleased to see the continuation of positive performance in terms of launches, sales and revenues, as well as the strengthening of our operating margins during the second quarter. As you can see on Slide 13 we have made strides in reducing G&A expenses, which at 2Q10 had fallen by 7% as compared to the previous year’s second quarter. I would like to highlight that the ratio of G&A / net revenue improved over 240 basis points year-over-year, and by almost 40 basis points sequentially. As compared to Net revenues, the overall result was an over 300 basis point improvement in our year- over-year SG&A ratios against Net Revenues. These improvements primarily reflect better operating leverage as a result of the synergies related to the merger of Tenda into Gafisa as well as top line growth in comparison to last year. A number of initiatives taken to improve Tenda’s operating efficiency are expected to continue to reduce its cost structure. For example, we expect the recent launch of SAP enterprise software at Tenda to help that operation become more efficiently, while increases in sales and revenues should contribute to additional dilution of our sales, general and administrative expenses in the medium to long term. Going to slide Slide 14: At the close of the second quarter, the backlog of results to be recognized under the Percentage of Completion method reached approximately $1.2 billion, an increase of 3.8% over the previous year’s quarter and an increase of 13.3% sequentially. Our consolidated backlog margin also improved sequentially, reaching 36.4%, 120 basis points higher than the first quarter of the year. This improvement reflects the fact that as we deliver older, oftentimes lower margin projects, our more recent higher margin projects have a greater impact on our results. This should continue to benefit our P&L operating margins. Slide 15 provides you with a look at our capital structure. Gafisa’s cash position of R$ 1.8 billion decreased from R$ 2.1 billion at the end of the first quarter in line with our increased activities and land bank acquisitions. We remain in a very comfortable leverage position with a net debt/equity ratio of minus 2.4%, excluding project finance. Additionally, we have 69% of our debt with long term maturities, which should improve even more, reflecting some long-term debt negotiations already in place. Our average total cost of debt today is equivalent to a comfortable 10.6%, per year, less than the current Selic rate. Our corporate debt is running with a spread of approximately 150 bps over Selic at the same time the cost of project finance debt is at 9% plus TR. 5
  6. 6. As expected, cash burn has increased as we picked up the pace of construction activities. As we deliver more developments and reduce our construction cycle, for example through the broader use of aluminum molds, which we are currently using in 7 projects under construction and plan to employ in 15 developments by year’s end. we expect to have positive cash flow in 2011. Our outlook for 2010 remains unchanged as we expect the macroeconomic scenario and market fundamentals to remain positive, and we are confident in our ability to execute our strategy of serving all segments of the Brazilian homebuyers through our three leading national brands. We reiterate that we expect to launch projects totaling R$ 4 billion to R$ 5 billion during 2010, and continue to expect the Company’s full-year 2010 EBITDA margin to be between 18.5%- 20.5%. Through the first half of 2010, Gafisa reached 38% of the mid range of the launches guidance, in line with historical seasonality. Regarding EBITDA Margin, we delivered 19.8% in the 2ndQ10 and 19.2% in the 1st Half 2010, well within the previously stated guidance range. Our final slide provides a snapshot of our share performance and liquidity in the last 90 days up to July 30th. Our shares continue to be the most liquid in the sector with over R$ 110 million on average traded daily and average daily turnover of 2.6% in the last 90 days. Gafisa remains the only Brazilian real estate company to be listed on the New York Stock Exchange. Thank you, and let’s now open the floor to Q&A. Operator: Thank you. We are now going to initiate the Q&A session. Should you have any questions, please dial *1. If your question has already been answered, you may exclude it from the list by dialing #. The questions will be answered according to the order they are received. We gently ask you to wait while the questions are being made. Once again, please dial 1 should you have any questions. Thank you. Dan McGoey, Citigroup: Good morning or good afternoon, gentlemen. A quick question on the launches, I know you mentioned that the launches in the Tenda division are going to be more heavily weighted to the 2H of the year and when we look at the launches that we saw in the 1H and in the 2Q, they were heavily weighted outside of São Paulo and Rio. Aside from, I guess, holding back some launches as you introduced some of those efficiencies, I do am wondering if you can talk about any of the bottlenecks that may have contributed to have much of your launches outside of São Paulo and Rio. Are you encountering logistics bottlenecks or are you finding it tough to fit within the price points that you need to in the low income in the more expensive cities? Thanks. Wilson Amaral de Oliveira: Hi, Dan. In fact, we are not seeing much of, let us say, important bottlenecks related to the Tenda's launches. The launches we did in the 1S are a much more, let us say, connected with our land bank, the land bank that we had at the moment we integrated Tenda. So as we have been informing during our calls, 6
  7. 7. the distribution of launches in the year of 2010 for the Tenda's products will be a little bit different from what is our traditional seasonality here in Brazil. Usually, we launch 40% in the 1H, 60% in the 2H. But in the case of Tenda, for the first year of integration, we are distributing something around 30% in 1H and 70% in the 2H. And we have today a very important pipeline of projects under the process of getting the approval and we have products not only in other regions outside São Paulo and Rio, but we also have projects in these very important markets in Brazil. So I believe that in the second part of this year, we are going to see a better distribution in terms of launches, better volumes, we will see a ramp up in terms of volumes and at the same time, you will see a better distribution as we improve the quality of our land bank. This is a process and I believe that in 2010, we are going to be much more, let us say, ready to develop better projects. But for the first year of Tenda's integration, this is exactly what we are expecting to deliver during this year. But so far, no important bottlenecks that I should mention here. Dan McGoey: OK. Thanks. And one follow up, if I can, on the margins now that we have seen the margins improve substantially year on year, EBITDA margins up to around the 20% level. Going forward, what should we expect looking out, I guess, to 2011? Do you see opportunities for additional margin improvement from some of the construction technologies you mentioned or even just economies of scale as the revenues move higher? Wilson Amaral de Oliveira: Good question, Dan. In fact, we consider 2010 a year of transition because as you remember, we incorporated Tenda in the last week of 2009 and we started the integration process in the first week of this year and we are in this process. Recently, we implemented the SAP in Tenda. So just to give an example, the 1H of this year, in fact we integrated the teams, but in fact we are working on two different platforms of IT in our Company, which is not the right way to do. So, I believe that with the implementation of this new IT platform and with the final integration of our teams, we will still see some opportunities in order to improve efficiencies and of course we are going to see a positive impact in terms of EBITDA margins. So, I believe that the guidance provided to the market, 18.5% to 20.5% of EBITDA margin is very adequate to this year of 2010. But yes, we see some room to improvements in margin. I believe that we should target on a recurrent base something around 22%, 23% with some variation depending on the mix we will launch. But you are right, we are still in the process. There is still some room to improve. Dan McGoey: OK. Thank you. Ricardo Lima, Itaú: 7
  8. 8. Hi, good morning, everyone. First of all, congratulations for the results. I would like to understand better the increase in the cash burn in this quarter and what we can expect for next quarters? And one more question if you allow me regarding prices, with saw you increasing your inventory prices at around 2%, I would like to understand if there is room for more and your view regarding market prices from now on? Thanks. Wilson Amaral de Oliveira: Ricardo, regarding cash burning, what happened in this 2Q, actually the operation is very strong. Probably this is the quarter that we will have the stronger activity in construction. We are also buying land, since we did the follow on at the end of the 1Q and now we are investing part of these proceeds in the acquisition of land. But we had especially in May a change in procedure that Caixa used to do. In May, they changed a specific procedure, they used to release the cash when we signed the contract, we, Gafisa or Tenda and also the customers. And in that month, they changed, now they are releasing the cash only when we register the contract at the notary office. So what we see is cash burning is an impact from this matter of approximately R$80 million. So this is an impact that represents about 30 days to 45 days of operation and we are discussing with Caixa to change the procedures again. They need to have an authorization from Central Bank. We are keeping close, but basically what happened was a change in Caixa Econômica procedure regarding the release of the money when the company signs the contract. Now the second question, you mentioned about the price increase that we have in our inventory, which was about 2%. Basically if you look at, especially in São Paulo's market, we saw price increases in all launches and then, what we did is we are adjusting our pricing of our inventory and then it reflects this 2%. Basically what happens is price increases in inventory coming from new products that we launched recently. Alceu Duílio Calciolari: And, just to complement, Ricardo, so far we have been able to increase those prices, and I believe that we still have some room to continue increasing prices. But this will always depend on specific projects, specific locations, because depending on volume of launches that we see in some specific region, so we have some impact in terms of demand. So in those specific regions, it is not possible to increase price. But this is a very specific decision, project per project. What we want to do is continue to put pressure in terms of prices, because on the other side, we see some pressure in terms of costs. So it is absolutely important to take advantage of all these opportunities that we have in terms of price increases, as we are suffering some pressures in terms of cost. So this is a process, we are very comfortable in doing this, but it is difficult to anticipate something. Ricardo Lima: OK. Thank you very much. Christine Hamilton, Private Investor: 8
  9. 9. Thank you. First of all, I wanted to say that, you guys, it is just so impressive that you are so well positioned in Brazil. I really do believe that that country is just booming and growing right now. I have been going there since the 80s. So anyway, I have a couple of questions I would like to ask you. The first one is, what is your build time for each one of your product line? Alceu Duílio Calciolari: Hi, Christina. Yes, we have different timeframes regarding different line of projects. What we have, starting with the low income, now we have a total cycle, using the new technology that we are mentioning in our earning release, we have a total cycle of about six months of construction using aluminum technology. So we are expecting that two years from now, 100% of our operation will be under this new technology. Today, by the end of the year, we will be operating with 15 projects under this new technology. So this is for the low income. So starting the construction today, we will be able to deliver in six months a specific project that can go over 500 units. It depends on how much we invested in aluminum forms. The second is the Gafisa brand. Gafisa's brand is a little bit different. The cycle is longer, it is about 30 months. We normally start the construction after six to eight months after launching. During these six to eight months, we use it pre-sell our product and then we start the construction that takes about 20 to 22 months to deliver a vertical building. And then we have AlphaVille. AlphaVille, we are only building lots, we do not build homes and the total cycle of AlphaVille is about 20 months from the launching until we finish all the infrastructure that we put in the raw land. What we do in AlphaVille is basically develop raw land and then we sell lots and customers build their own homes. This is in summary how we do. Christine Hamilton: I got you. What is your cancellation rate? Alceu Duílio Calciolari: It depends. It depends on, in the case of AlphaVille is very low, it is about 3%. In the case of Gafisa, it is also low, higher than AlphaVille, approximately 5%. In the low income is higher, it is about 10%, between 10% to 15%. So we have the cancellation, but we do not deliver the units we have to resell the units after the cancellation. Christine Hamilton: Yeah, that is very well. And if you do not mind, I would like to ask one more question. OK. On your swaps, that was another thing I was curious about, so you swap with the landowner and essentially, they give you the land and in return you give them, say, 15% to 20% of the units that you construct. Is that Correct? Wilson Amaral de Oliveira: 9
  10. 10. Yeah. That is correct. That is how it happens. Christine Hamilton: Yeah. So that being the case, how do they sell them if you will at the end or do they rent them or, what I am wondering is, are you competing with those units for sales? Wilson Amaral de Oliveira: No. We have been doing this for many, many years. What we do is, we agree normally with the landowner that we start to sell together. So using your example, 10% of swap agreements, we have 80% of the development and the landowner 20%. We start selling, each 10 units, eight is mine, two belong to the landowner. So we sell together or they sell after. Normally, they sell after because they expect some appreciation. Normally, they do not need the cash up front so they wait the building to get done and then they sell. Christine Hamilton: OK. Thank you very much. Operator: The Q&A session is now finished. I would like to pass the floor back to Gafisa for its final considerations. Wilson Amaral de Oliveira: OK. I would just like to thank you for your participation on our call and look forward to see you here probably in October in our next call. Thank you again. Alceu Duílio Calciolari: Thank you very much. “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.” 10

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