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  • 1. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 Operator: Good Morning. Welcome to Gafisa’s conference call for the results of the Third Quarter of 2009. With us today is Mr. Wilson Amaral, Gafisa´s CE 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 third quarter 2009 conference call. I am joined here today by our CFO, Duilio Calciolari, and our Investor Relations Manager, Luiz Mauricio Garcia. Well, what a difference a year makes! The outlook for homebuilders brightened considerably during the third quarter as investor optimism towards Brazil returned and governmental actions played an important role in accelerating the economic recovery and helping to avert a prolonged recession. The credit markets have reopened and are now back to business as usual while demand from homebuyers across the economic spectrum has picked up significantly. At Gafisa, we have put in place an operational platform that allows for scalability to meet the demand. The R$800 million in sales during the quarter continued to be driven by all segments of Gafisa’s product portfolio which serves a cross-section of the population. Accelerated sales will be driven by our aggressive introduction of new developments during the fourth quarter and beyond-- We have already booked R$367 million in launches for the month of October and are seeing early sell-out situations in a number of our developments. Brazil’s housing deficit remains very real and is estimated at 7 million families today with continued growth of 1.5 million new households per year. The demand for new housing is supported by the expansion of real wages, a fall in unemployment rates, and improving consumer confidence. Looking forward there are high expectations for a sustained and robust growth cycle with estimated GDP growth of around 5% into the next few years. With three investment grade ratings now in place from Standard & Poor’s, Moody’s and Fitch, a historically low Central Bank Selic rate at just 8.75%, and continued normalization of credit markets evidenced by the success of a number of recent equity and debt offerings, financing 1
  • 2. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 is now available from an array of sources. At the same time, CAIXA has renewed its commitment to providing flexible and affordable financing by adding R$3 billion of FGTS funding for a total of R$6 billion for homebuilding. In addition to TENDA’s highly favorable R$600 million debenture issued under this program earlier in the year, Gafisa expects to close a debenture in the amount of up to R$600 million for financing of units up to R$500,000 throughout the country by the end of 2009. Over the last four years we have built a solid platform to serve the diverse housing needs of Brazil’s families. TENDA, which has spent much of the year restructuring and optimizing operations, putting a solid funding capacity in place, solidifying relationships with CAIXA, and launching innovative products for its market is now poised to capture the enormous opportunity at the lower end of the market. And, Alphaville and Gafisa are geared up to meet the renewed demand of the mid and upper end segments representing a market potential of R$100 billion per year. With the World Cup in Brazil and the Olympics in Rio de Janeiro, there will be very sizeable investments in infrastructure. We expect to benefit from our strong position in all segments and leverage our land bank and network of relationships in that state and others going forward. Now, let’s turn to Slide 4 so I can give you a snap shot of some of the key financial achievements of the third quarter. I am pleased to say that our operating results for the third quarter of 2009 were quite strong. Our pre-sales during the quarter increased 48% year-over-year to R$800 million, and sales velocity was 21% driven by new launches and continued focus on sales from inventory launched prior to 2009 which accounted for 30% of total consolidated sales. Net operating revenue, which is calculated on a percentage of completion basis, rose 139% to R$877 million as we accelerated the completion of developments begun in earlier periods. Third quarter adjusted EBITDA climbed to R$179 million, representing an EBITDA margin of 20.4%, an increase of 157% over the prior year. Profitability remains strong at Gafisa and Alphaville where the combined EBITDA margin was 22.8%. With strong liquidity in place, we are well positioned to fund our current growth plan. Cash and equivalents were R$1.1 billion, 4% higher than the previous quarter and 42% higher than at the end of Q308. Turning to Slide 5, I’d like to go over some of the recent and most important developments during the quarter. In addition to increased demand for TENDA’s affordable entry level products, Gafisa also experienced strong sales of the mid/mid-high level products of Gafisa and Alphaville. Indicative of the demand recovery at the mid and higher end, are third quarter launches in São Paulo and Salvador. Already 100% sold, the Magno project in São Paulo which was launched in September will accelerate the start of construction by two months. And, in Salvador, mid- level developments Acupe and Brotas, experienced an 85% sales rate within the first month and a sell-out on its first day of launch, respectively. With the introduction of aluminum frame molding as a pilot project, TENDA is now able to gradually reduce the construction cycle of its most affordable product from 10 to 4 months. Thus, under Super 6, TENDA is able to guarantee unit delivery within 6 months, offer a low, 6% down payment requirement, and a first mortgage repayment period of 6 months. 2
  • 3. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 A further driver of future sales for TENDA is the October 1st announcement by the government expanding the number of cities currently eligible to receive subsidies and raising the unit price caps for most cities. The announcement included additional geographic expansion beginning in January 2010. With a national presence and current designation as a CAIXA Bank Representative in 6 regions, TENDA is well-positioned to leverage this expanded opportunity for growth. Our company’s national reach has expanded in all divisions in a relatively short period of time. We are now present in 21 states, up from 10 states and 16 cities only 3 years ago, with 250 developments underway across the company. This ability to manage such a diverse array of projects across an enormous geographic expanse is facilitated by our prioritization of and investment in human capital. With 450 engineers in training and 250 on the ground plus a formation of executive talent fed by new trainees each year, we are well-positioned to continue to execute on our reputation of delivery of projects on time and within budget. Our cash position of approximately R$1.1 billion could soon be augmented by an R$600 million debenture to be issued through CAIXA and expected to be completed within the fourth quarter. Final terms are expected to be announced shortly, but the debenture will act as a revolving line of credit, allowing Gafisa to fund up to 90% of the total project cost including land and construction costs of units up to R$500,000 in sales price. Gafisa is a beneficiary of the Government’s recently renewed commitment to funding the construction of affordable homes by doubling to R$6 billion the amount of FGTS funds available for use to finance home building. Finally, we are pleased to announce our intention of merging all of the rest of TENDA’s outstanding shares into Gafisa. We are very enthusiastic about the progress made to date at TENDA and see this action as a way of further improving efficiency, profitability and shareholder liquidity. I’ll go into further detail in the next slide, but we expect to present to our shareholders for approval the terms of the transaction by the end of 2009. Slide 6 and 7 provide further insight into the rationale and process for the incorporation of TENDA’s shares into Gafisa. We are very bullish about the opportunity presented by the affordable entry level segment in Brazil and believe that the TENDA model of sales, product mix and geographic reach is the best way to participate in this segment. We have worked closely with the TENDA team to consolidate its operating platform, raise appropriate funding and develop its marketing approach. We believe that through consolidating all of the rest of the outstanding shares of TENDA, there are many further benefits that can be achieved. Some of these include: Achieving further economies of scale -Taking advantage of Gafisa’s buying power in the market for goods and services An increase in the operational, commercial and administrative efficiencies. While we will be careful to maintain the teams dedicated to building for and selling to this very unique market segment, there are areas of the business that may be further leveraged to increase efficiency. Optimization of a consolidated balance sheet. The combined balance sheet will provide additional negotiating leverage and flexibility to all companies. 3
  • 4. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 Streamlined administration. Certain overhead areas may be further reduced. Greater share liquidity with the consolidation of these two powerful investor brands. To give you a sense of potential liquidity, the combined companies could trade at R$150 million per day when adding the average daily liquidity in based on October figures of Gafisa’s trading volume to its local and ADR shares as well as to TENDA’s local shares. At this time, in accordance with CVM Guidance 35, TENDA has formed an independent special committee to represent the company in its negotiations with Gafisa’s management. Based on historical prices, Gafisa’s management believes that an adequate exchange ratio would be between .188 and .200 of a Gafisa share for each TENDA share. All in all, we believe it is a win-win transaction. The preliminary time schedule is located on slide 7. Assuming the parties achieve satisfactory terms during the first 3 weeks of November, we expect to present the transaction to the Gafisa shareholders during the week of the 21st of December. Moving on to Slide 8. One of our key competitive advantages is our high quality, diversified land bank. We have 313 different sites across 21 states. From a PSV perspective, Gafisa represents 46.2% of our R$15.3 billion land bank, while from a unit perspective; Tenda represents about 59% of the potential 95 thousand units. A large majority, 85%, of our land bank has been acquired through swaps increasing the financial attractiveness of our land bank. As you know, the entire Company took a fairly conservative approach towards new launches and focused our attention on sales of units from inventory and conservation of cash while the economic climate remained uncertain during the first half of the year. In the third quarter this philosophy remained, although the economic picture became clearer. We began to gear up launches and focused on ensuring that we would be able to execute our aggressive launch plans for Q42009 and beyond. Slide 9 shows the new launches for Q309, the focus on the types of units sold and our inventory levels. Total launches for the period was R$514 million of which 55% of Gafisa’s launches were for units priced below R$500 thousand while nearly 42% of Tenda’s launches were for units priced below R$130 thousand. With an abundance of attractive inventory from previous period launches, pre-sales net of cancellations reached R$800 million, a 48% increase over Q308. 62% of the pre-sales of Gafisa’s units were priced below R$500 thousand while units priced below R$130 thousand corresponded to 87% of TENDA’s unit sales. Finally, overall sales velocity was 22.1%. While Gafisa sales velocity increased as compared to the previous period, the overall company velocity is slightly down due to the Tenda’s reintroduction of 3,587 units that were previously blocked within the inventory. Such units and the associated projects were examined to comply with Tenda’s minimum economic and financial performance standards. Without Tenda’s impact the consolidated sales velocity would be 25%. 4
  • 5. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 As I mentioned earlier, we expect to have a favorable launch period in fourth quarter and continue to expect to achieve our overall sales guidance for the year of R$2.7 to R$3.2 billion. Thank you and now let me turn it over to Duilio. Alceu Duílio Calciolari: Good morning, everyone. As Wilson mentioned, we turned in another quarter of solid operating numbers during the third quarter of 2009, which reflected contributions by all segments of the product portfolio. I would like to point out that we have adjusted our 3Q08 numbers in accordance with Law 11638, which brings accounting standards closer to IFRS for comparison purposes with the 2009 numbers. Turning to slide 12, you can see that we continue book solid sales in all segments of our business. These fairly balanced results across our different business lines drive the backlog of revenues to be accounted for in future periods, as our projects are completed. At the close of the third quarter, the backlog of results to be recognized under the Percentage of Completion method exceeded to R$ 1 billion, a 42.8% increase from 3Q08 and a decline of 9.7% from 2Q09 also due to the accelerated construction pace. Additionally, as TENDA shortens its construction cycle in the affordable entry-level segment, we expect to be able to accelerate revenue recognition. Slide 13 shows that in the third quarter our SG&A increased to R$113.2 million, mainly due to Tenda’s sales model, Gafisa’s expansion and business diversification strategy. As Tenda sales and revenues ramp up in the following quarters, its sales platform costs will be diluted and additionally, its fixed cost ratios improved. When compared to the 3Q08, the Consolidated Selling Expenses/Sales and also the G&A/Net revenue ratios improved, falling respectively by 60 and 170 basis points. Slide 14 gives you visibility into our financial position. As of September 30, 2009, Gafisa had consolidated cash and cash equivalents of greater than R$1.1 billion, which was 4% higher than what the Company had as of June 30, 2009, and 42% higher than at the close of 3Q08. The consolidated results reflect the proceeds of Tenda’s R$600 million debenture through Caixa. Gafisa also expects to close a debenture of its own of up to R$600,000 for financing of units of up to R$500,000. Our cash burn rate increased substantially in the quarter, by almost 120% from R$111 million in 2Q09 to R$244 million in 3Q09. The large sequential increase reflects the resumption of a higher pace of construction in the third quarter and also the fact that in 2Q09 the company completed a R$70 million securitization transaction that reduced the net debt by that amount. Net debt including obligations to investors was R$1.7 billion and our net debt and obligation to investors to equity and minority interests ratio increased to 74.0% as compared to 65.6% in 2Q09. The Company continues to have access an array of debt market instruments should the Company have a need to exercise that option. However, it is important to note that 80% of construction projects have financing lines in place and that Gafisa has a total of R$3.5 billion in construction finance lines of credit provided by all of the major banks in Brazil. At this time, we have R$2.1 billion in signed contracts and R$284 5
  • 6. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 million in contracts in process, giving us an additional availability of R$ 1.1 billion. We do not have exposure to foreign currency through financial instruments. Slide 15 provides a snapshot of our share performance and liquidity during the month of October. Gafisa shares continue to be the most liquid in the sector and we remain the only Brazilian real estate company to be listed on the New York Stock Exchange. Finally, as we move to Slide 16, I’d like to mention that we feel our record of execution, diverse residential product lines, respected brands in all income segments, and national footprint position us extremely well to capture the continued growth of the entire homebuilding sector. Gafisa reaffirms the outlook that it has provided on sales and EBITDA margin in 2009. Our sales strategy and conservative approach during the first half of the year have led us to concentrating our launches mainly in the final quarter of 2009, and as noted, launch activity has increased substantially in October to R$ 367 million. On a consolidated basis, we expect launches in the 4Q09 to be two times higher than the 3Q09 figure. Gafisa’s consolidated sales for the full year 2009 is expected to be between R$2.7 and R$3.2 billion with a consolidated EBITDA margin in the range of 16% - 17% (without the goodwill impact). Thank you, and let’s now open the floor to Q & A Guilherme Vilazante, Barclays Capital: Hello, good morning. I have two questions, one is related to the SFH, we have seen that the balance of SFH loans have increased by around R$100 million this quarter and is much less for example if you get only the cost that the Company is reporting is around 25%, everything that the Company has spent this quarter or has deployed in construction this quarter. We just would like to check so how do you think this is going to evolve in the future? And if the Company expects it is going to represent a more important stake of everything it deploys or it spends in construction in the future? My second question is related to the sales of inventory, I am not sure if I got the right number, I just would like to check what percentage of what you have launched in the 3Q was sold in the 3Q so that we can see a breakdown of the sales speed? Alceu Duílio Calciolari: Hi, Vilazante, regarding the first question, SFH, Vilazante, we have been discussing this subject along of the last few quarters and we are also saying that we will see a ramp-up in the balance of SFH fund. Today we have Gafisa plus Tenda, the outstanding amount is about close to R$500 million and we will continue to see this number ramping up. What happens is that when we are delivering a lot of projects we are also doing the amortization of this balance. So, we are expecting the ramp-up to continue in the next few quarters and on top of that is important to mention, Vilazante, we are holding some projects to be used in the CAIXA debenture. So, as long as we are preparing for a new debenture issuance with CAIXA, we are holding some products that we have ready to be financed for CAIXA that will have the same rule compared with SFH financing. So, this is what we are expecting regarding the SFH and the debenture from CAIXA. 6
  • 7. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 Wilson Amaral de Oliveira: Hi. Answering your question about our sales of launches in the 3Q, we launched approximately R$515 million in the quarter and we sold R$205 million out of those R$515 million, which means approximately 40% of sales and we already closed our month of October and sales in October went well. So, as we reaffirmed in our last call, sales velocity are doing well and not only for those products for the affordable entry-level products, but also for the Gafisa and Alphaville projects. Guilherme Vilazante: OK, thank you. Gordon Lee, UBS: Hi, good morning. Two quick questions, the first has to do just with the expectation of the pickup in construction activities in the next couple of quarters. I was wondering if you could tell us what you would expect the cash burn rate to be in the 4Q and even beyond that if you can, but at least for the 4Q. And then the second question, just on the reintroduction of the inventory from Tenda, the units that had been taken out and have now been partially reintroduced. Would you expect margins there to be similar or will we see the backlog margin at Tenda compressed further as those units start translating into sales and included in the backlog? Thank you. Alceu Duílio Calciolari: Hi Gordon, regarding the cash burn, you are right, we are seeing a lot of activity now and we are increasing the construction activity in Gafisa and also in Tenda. So, we had this cash burn of around R$240 million, and we are expecting the same level for the last quarter. We are expecting this, the ratio net debt equity that we closed with 74%, we are expecting something around 80% to 85% by the end of the year. And the following quarters, it would depend on our activities regarding land acquisition, especially regarding land acquisition, because as soon as we finish our five-year business plan, we will have much more visibility in terms of cash consumption, but I would say that in our internal models, we would not go up, we can go up to 100% one-time net debt equity, this is our threshold in terms of this ratio. Regarding the inventories, I think Wilson can mention. Wilson Amaral de Oliveira: Hi, Gordon, talking a little bit about the blocked inventory, as you remember, I believe that it was in the 1Q of this year, we blocked some inventories, something around 8,000 units and the reason for this blocking was exactly to review those projects and make sure that we will deliver similar margins to the Tenda's projects. So, I do not expect any reduction in margin because of that. We work on those blocked units for two quarters so we had the possibility to review the projects, in some case we had to re- approve the projects, and that was exactly the reason. So, we will continue analyzing those 7
  • 8. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 other 3,500 units still blocked and we believe that we will release those units in the next quarters. But we are not expecting important changes in terms of margins for those specific products. Gordon Lee: Perfect. That is great. If I could just have one follow up on the debt question, Duílio, you said that your internal models, that you could take the net leverage up to 100% of equity. When you speak to your rating agencies, do you speak about that number and is that something that you think is compatible with maintaining your current ratings? Alceu Duílio Calciolari: Yes, according to our internal models that we try to reflect the same model of rating agents, going up to 1.1x or 1.2x our net debt ratio, we continue to be in an area of investment grade. We may have some downgrade, but we will continue to be in the area of investment grade, this is how we see. So, going up to 1x gives us some comfort in terms of rating for that. Gordon Lee: Perfect, that is very clear. Thank you. Marcelo Telles, Credit Suisse: Good morning. I have two questions. The first one concerns launches in the middle income segment. There was a decrease from 3Q to 2Q, and I heard that there have been some problems related to approval. I would like to know if you had problems with the approval process and if you consider that a major risk. And the second question concerns the merger with Tenda. Could you tell us if you already have an estimate of what you will be able to achieve in terms of cost reduction? Or if you cannot quantify this, could you at least give us a position regarding the areas in which you see potential for margin improvement? Thank you. Wilson Amaral: Good morning, Marcelo. Good questions. First of all, with reference to approval, I believe that some difficulties in the approval process right now are normal, since companies in general had reduced their launches in the first half of the year. What happens is that now all the companies are coming back, so there is a backlog of projects trying to obtain approval at the moment. So we first began seeing this in 2006, 2007. It takes some time for the regulatory institutions start the approval process, but then is moves faster. In the case of Gafisa, I can tell you that we have not had any major problems with approval. What’s happening is that we have some projects slated for launch in 4Q, and these are large projects. And the approval process of large projects, as opposed to others, even because of the traffic analysis done by the CTLU here in São Paulo, takes longer. But I would say that, in our case, we are in line with our plan. 8
  • 9. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 And I don’t think that, from a general perspective, there are any structural problems with that. Here’s what I think: there was an idle period, now companies are returning and this causes delays; we all came back pretty much at the same time, so the work piles up. But I don’t believe there is a problem. About the merger, we don’t have any numbers yet. Obviously, we have several ideas and we are focusing on our belief that it is essential to maintain the business team and the construction team, each one focused on its business. The businesses are different, the sales processes are different, the products and standards are completely different. So, it is very complicated to combine these areas and think that that will give us huge savings. On the other hand, after a year of working with Tenda, we already know that there are many other areas where we can create synergies. Some things are obvious, like when Tenda’s shares are no longer traded there will be some redundant areas, and their existence would no longer make sense. But today, in the back-office areas, we see a very interesting potential for synergy, and we think that will be quantified after the merger. You know that we are still in negotiations, but I think if all goes well and the merger is approved, for 2010 we will have a very nice plan to start the year, with some very nice savings. We’re talking about cost and expense synergies, but more importantly process synergies, which affect expenses and revenues. We believe that Gafisa’s purchasing power, the processes developed by Gafisa, for example, for prospecting, may be very valuable for Tenda, without undermining the team’s dedication in that business model, because I think this is also fundamental. We’ll come back to this subject, maybe around 60 days from now, but we’re already working on these potential improvements, and I believe that there is a very interesting potential for gains for both companies. Marcelo Telles: Thank you, Wilson. Marcello Milman, Santander: Good morning, everyone. Congratulations on the results and the info break down, it really is a standard for the sector. I have two questions. The level of revenues recognized was really high. I just wanted to see with you all if this is mostly because you sold a lot of your inventory that was already closer to completion or if, with your quarterly pace of construction, we should expect levels close to or higher than this in the next quarter. That would be my first question, concerning revenue. And the second is: in your statement of income you have R$40 million in other operating expenses. I would like to know what those are. Wilson Amaral: Marcello, I will answer your first question and then Duílio will answer the second one. In terms of revenue, what you see is nothing more than project maturation and previous sales. We 9
  • 10. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 expect this level to hold steady, and I think that if we look at our three companies, we still have a lot of potential, especially Tenda. You probably have already analyzed the results and you see that Tenda’s SG&A hasn’t reached the right level of dilution. Why is that? It is not that G&A is higher than it should be. I think that SG&A is in line with the business volume, and in terms of revenue perspective, we haven’t reached this business volume yet. But you should look at these last two quarters, because then you will see that, on average, Tenda’s sales volume stood at approximately R$360 million while revenues were around R$250 million. So, there is still the potential to increase Tenda’s volume of revenues, which is exactly this convergence. Tenda’s sales volume is different from the recognition level. This is mainly because of internal adjustments, since this is one of Tenda’s first years of operation with the Company. Basically, I think revenue levels will remain stable, with a potential for growth as long as we have more launches and are able to maintain the sales velocity we achieved over the course of the year. We think the business is very sustainable. Alceu Duílio Calciolari: Marcello, about the other expenses that total R$37 million, you have a R$40 million item, specifically a R$37.8 million item. There is some detailed information in the Quarterly Information (ITR), pages 52 and 53, but this refers to civil actions related to our former shareholder CIMOB, for which the Company is liable. We are the defendants, and this is a legal matter that I’m not very familiar with, but Gafisa is responding to suits filed against the former shareholder by several entities, and we are making a provision for that based on our legal counsel. We think there is a chance that we will not lose. We are working hard to win these suits, but we are being conservative and our attorneys have recommended that we make these provisions. To give you an example, a well-known case, we have already spoken about this several times: right after we held our IPO, R$27 million of our IPO was blocked due to a lawsuit filed against our former shareholder CIMOB, and the liability fell on Gafisa—we weren’t even aware of the situation—blocking the funds. Today this business has evolved, the cases are still being heard and our attorneys have recommended that we make provisions. That’s what we are doing. Marcello Milman: But was there anything specifically in this quarter? This is a figure that we can pretty much follow quarter to quarter and it has increased significantly. Alceu Duílio Calciolari: Last quarter this item corresponded to R$27 million and this quarter R$37 million. It’s the same item. Marcello Milman: All right. Thanks. 10
  • 11. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 Marcelo Motta, JP Morgan: Good morning. My question was also related to these other expenses, but that has already been clarified. Is R$40 million the maximum or should we expect an increase next quarter? Could you also comment on the performed receivables? This quarter, we saw a string of development deliveries, so I would like to know what your performed receivables level is like. Thank you. Alceu Duílio Calciolari: This figure is not expected to increase. I don’t expect anything at this level next quarter. Obviously, we will always make provisions, but not above this level. We hope to have exhausted this subject, in terms of provisions at the levels that you see. Regarding performed receivables, you are right, we delivered a lot this quarter. We delivered a very nice volume and will continue to do so. But here’s what happens: if you remember our model, 80% of our sales are passed through. So, what stays here is very little. There are receivables, yes, especially from AlphaVille; in terms of Gafisa they are not so relevant, given this sales model that passes through on the date that we deliver the units. We did not emphasize this figure, but today we have, to securitize until the end of 2009, the beginning of 2010, approximately R$100 million. It is not a lot. Marcello Milman: Okay. Thank you. Cristiano Hees, Brascan Corretora: Good morning, everyone. I would like to know more about the progress of the business plan for the coming years. Do you have any idea what kind of increase we can expect in terms of PSV launched or sales in 2010? And I’d like to ask about the margin. You have put a lot of emphasis on the margin, and Tenda has brought the EBITDA margin down. However, Tenda’s revenues are expected to increase from now on. So, what do you believe will happen to the consolidated margin? Another quick question: do you think that signing this debenture issue with Caixa and incorporating Tenda will somehow eliminate the possibility of renegotiating Tenda’s debentures next Abril, be it the term or increasing the credit line, because a consolidated company is too exposed to these instruments? Thank you. Wilson Amaral: As for the first part of your question, we are in the process of reviewing our five-year plan. We do that every year, from October to December, when we also detail our plan for the next year. We are in the middle of this process, and this year, maybe a bit differently from others because of the possibility of incorporating Tenda, we will have another round of analyses because of the synergies we’re looking for. So, that changes the process a bit. 11
  • 12. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 From the business perspective—differently from what happened this time last year when we presented our 3Q08 results, and that was the quarter when Lehman Brothers collapsed, we didn’t have a vision for the next three months. It was a very difficult year, and our strategy of selling off the inventory proved correct. This year, as opposed to last year, we can see much further ahead. All the scenarios that we are hypothesizing are positive. Bear in mind that we are completely focused on the residential market, but at all income levels. So, the evaluations that we make, to a certain extent, seek to seize opportunities at all the population’s income levels. And all levels, perhaps except for the lowest income groups, are very promising. We can’t talk about volume yet; following our guidance policy, we are going to discuss guidance at the first meeting of 2010, when we will disclose the results for the end of 2009. But, obviously, we are very optimistic. I don’t know if you noticed our launches last quarter, but in fact the velocity we have obtained is much higher than the one we saw in 2007 and 2008. So, I think that the companies have a good balance sheet, a good statement of income, they are well capitalized, have a good operating platform, and now they will enter an extremely positive, sustainable cycle, which I think it’s the most important thing. Our business has a long cycle, so working in fits and starts is deadly for us. So, we need to have a vision for the next few years, at least; at least within the cycle of our product, which can be five years. So, we are very optimistic about business volume. Regarding the margin, I think that your question is legitimate: if you analyze Gafisa’s and Tenda’s EBITDA margins, the difference is exactly the level of SG&A dilution because Tenda has not reached the volume of revenues yet – not the sales volume because it already has a sales volume that is much higher than the revenue level. But the revenue level will converge on the sales figures. So, I think that the dilution issue is automatic. I’d like to point out once again: Tenda’s structure, differently from most companies in our industry, is essentially composed of fixed costs. It is the only company with more than 30 stores all of whose sellers are employed according to the Consolidated Labor Laws. So, the issue of Tenda’s volume is much more critical than to any other company in the sector, where 70%, 80% of the sales cost is variable. In the case of Tenda, we can take comfort in that. We have the right structure and, as the revenue and sales figures converge, we will have an automatic dilution, and I imagine that when we are ready to discuss this, in the beginning of 2010, when we are ready to talk about guidance – and usually we provide a guidance of launches or sales, a top line and bottom line guidance, for which, in our case, we have also provided an EBITDA margin. So, I think that we will be able to reflect on this convergence of revenue that we are seeking for Tenda in our next guidance. We are feeling very confident about that. I am going to let Duílio answer the question about the debentures, because he the details about the impact of this debenture issue on the cash position. Alceu Duílio Calciolari: Let’s talk about the debentures. Basically, what do we have here? We have a debenture issue that finances low-income products, up to R$130,000 – that’s the structure of Tenda’s first 12
  • 13. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 debenture. It does not mature next year; you mentioned that it matures next year, but these debentures mature in five years. So, it is focused, it has a better cost associated with it because it is directed at products of up to R$130,000, so it costs TR (reference rate) + 8%. It totals R$600 million. Gafisa is investing, also up to R$600 million, in products up to R$500,000 in the scope of the Brazilian National Housing System (SFH). In terms of risk, which you mentioned, our balance sheet would show R$1.2 billion in construction finance lines, consolidating low, middle and upper-middle income groups, like we have with the other commercial banks. As the other commercial banks, we also have approximately R$1 billion in construction finance lines. So, this is another line we’ve added to our balance sheet, with risk associated to project financing, which is basically the same as the SFH. Obviously, Caixa Econômica will evaluate this transaction, and we haven’t received any positive or negative signals about whether the incorporation of Tenda could affect our debenture issue, and we expect to conclude this by the end of the year, which is very good. Actually, it is an additional line complementing what we already have in the SFH, which we didn’t have until this year; up to 2008 we only worked with the SFH, and today we have this other resource available. It will cost a little more, between 9 and 10, we are not sure yet, we are still negotiating. But it is definitely a credit line that significantly contributes to our sector, not only to Gafisa. Cristiano Hees: Got it. Another question: with this credit line, the launches, from now on… Now that you have around R$1 billion for 4Q, and Tenda should account for half of that amount, do you expect Gafisa’s share to be concentrated on launches of up to R$500,000 and the launches above that to be significantly reduced? Wilson Amaral: You probably have seen that Tenda’s launches are concentrated at the R$130,000 level, which is the Minha Casa, Minha Vida (My House, My Life) program. In the case of Gafisa, they are well distributed, but we have products for the middle/upper-middle segments. You must have seen on our report that our luxury products also did very well. We had luxury products – we mentioned this during our presentation – that completely sold, and these are products priced around R$1 million. For example, we have – and we are already preparing the sales stands – a product slated for launch on Leopoldo Couto de Magalhães Street, near Faria Lima, whose average price per square meter is for high-income buyers. And the pre-launch campaign is going well. So there is a variety. We have products ranging from R$300,000 to R$350,000 and also products priced at R$1 million, R$800,000 and even above R$1 million. So we are in a very comfortable position, even because of what’s happening in the Brazilian market, with reduced the interest rates depending on the product’s profile, and I’ve just mentioned this project that we’re going to launch on Leopoldo; it’s a product that’s very attractive not only for people who want to live there but as an investment, and the demand for 13
  • 14. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 real estate to replace other forms of investment is evident. It is a clear mechanism that we are seeing, and obviously we are making the necessary adjustments to the product so that we won’t miss out on the opportunity. So there is a bit of everything, including luxury products. Cristiano Hees: All right. Thank you. Have a nice day! Paola Mello, Fiducia: Good morning! Congratulations on the sales. My question is about these cycle reduction initiatives. I would like you to tell us a bit, in months, about how the cycles are and what they can become, and about the impact of this on the internal rate of return (IRR) and the Company’s return on equity (ROE). Wilson Amaral: Good morning. We mentioned this in our presentation and I think Tenda showed this in their presentation yesterday—it’s a product that we have, it’s still a pilot project, the first launch was not too long ago and it was well received—it’s our Super 6 product, based an idea that we’ve been trying to develop for some years, and now, apparently, we can do it. So what we’re doing is developing a product with a reasonable down payment but no special installments to be delivered within a reasonable term as well. And the basic idea of this product is that families, especially lower income families, shouldn’t have to make monthly payments on a house for future delivery while paying rent, because that makes our business unviable. So, I think it’s a good idea. Obviously, the transition from long to short cycle products takes some time, because not only are there adjustments in financing but also adjustments to the characteristics of the land bank itself, so there’s an entire process, it doesn’t happen overnight. But we are already using modern concreteting techniques with aluminum molds, so this project is already being tested. Actually, you probably remember this: I think that the first pilot project was in our former Bairro Novo in Cotia, with 500 houses delivered in six months. I believe that this changes and reconfigures our business. I just think that the transition is a bit slow. In the case of Tenda, here’s what we are doing: products that had, most of them, 12 to15 month cycles, we’re talking about construction cycles – not the full cycle, but the construction cycle – of approximately 4-5 months, and it’s going well. So, we estimate that next year.... Our plan is not set in stone yet, but part of the products to be launched next year are already following this strategy, and as our hypotheses are confirmed, we are going to increase the volume or share of this type of product in our product portfolio. I don’t have the return figures here, but if you compare the two companies, there is a big difference. In the case of Gafisa, you have an approximately 30 month cycle between launch and delivery. Tenda, with traditional products, has a cycle somewhere between 18, 20 months. And this new product can bring this cycle down to six months, something like that. 14
  • 15. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 Here’s what this means: in the case of Tenda, if you are going to increase your working capital 2.5x, if you compare this with Gafisa, you are talking about a difference of 5x. In terms of IRR, in terms of return, the impact is direct, there’s no other way. But if you can double, depending on the mechanics because, once again, the challenge is not only to build, the challenge is to build and finance, working with Caixa Econômica. The cycle is longer than that, but we believe that the rates of return for this product can easily double. Paola Mello: Okay, excellent! Thank you. Rafael Pinho, Banco Safra: Good morning, everyone. My first question is related to the information about inventory presented in the earnings release. There’s a note there saying that one of the reasons why Tenda’s sales velocity decreased in the period, probably compared to the rest of the industry, is that in this quarter 3,500 units were reintroduced to inventory, which were previously blocked. I’d like to know abouth how this business of blocking and not including in the inventory works. And also, the earnings release says that there are another 3,500 units that are still blocked, so they wouldn’t be included in Tenda’s inventory. My second question concerns the Fit-Tenda operation. In the statement of income you have a line that seems non-recurring to me, which corresponds to a gain with Tenda’s incorporation of Fit. I imagine that this is non-cash, and looking at the EBITDA reconciliation I don’t see this amortization being excluded. I would like to know if I am mistaken about the EBITDA reconciliation. Wilson Amaral: I will answer your first question and then Duílio will answer the second one. About these units you mentioned, the 3,587 units, I can’t remember, but I think that it was in 1Q09 or 4Q08, when we had the Fit-Tenda merger at the end of 2008, we did a general revision of all businesses in progress, and products that had been launched some time ago were taken off the shelves, we sort of removed them from the market; if I’m not mistaken, it was nearly 8,000 units of products that we weren’t sure if we needed to adjust them within the thresholds we have for the Company in terms of margin and approval. There were some products that presented one or another technical problem. So, at that time, we took nearly 8,000 units out of the inventory. That was reported, I just can’t remember if it’s on the 1Q09 results, but this information was disclosed in detail at that time, and we informed the market then that this year we would go back to each of these projects, review their conditions, and all those that we were able to readjust according the thresholds that we think are adequate for approval for the Company would return to the shelves. This process was initiated in the beginning of the year, and at the end of the quarter we had evaluated around 3,500 units. So, we have already returned these units and there is roughly the same number of units being evaluated, and we expect a portion of those to be returned. If these units don’t comply with the standards, they won’t be returned and will be considered cancelled. This matter was extensively discussed in our previous reports. Why did that affect the sales velocity? Because Tenda’s management made the decision, after evaluation by internal approval committees, to put these units back on the market, there 15
  • 16. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 were more than 3,000 units, and obviously they entered in the normal sales velocity, causing a significant impact in the month that it enters. So, why are we doing this reconciliation of the sales velocity from 22 to 25? Because if we had reintroduced these units in the October 1 inventory instead of at the end of September, the sales velocity would have been 25. Now this product has been reincorporated with the inventory and will obey the Company’s sales velocity. If you want more information about this, we can provide it, but this subject was actually thoroughly discussed in our previous reports. Alceu Duílio Calciolari: Rafael, the gain that you mentioned in our income statement is also a recurring subject. If you open our earnings release to page 12, there is a footnote showing the net effect of provisions that we have also talked about here, the effect in the quarter and accumulated on Tenda’s earnings and the provisions that we made. This effect in 3Q09 is R$14 million and in 9M09 it’s R$77 million. When we provided the guidance for Gafisa’s consolidated EBITDA margin, ranging from 16% to 17%, it already excludes this item, although in our results, the way we report them, we don’t exclude these items as non-cash--though we respect the view of journalists and it is in fact non-cash, we understand, we think that the gain effectively exists and we are benefiting from the transaction. But if you exclude this gain, in 9M09 the Company’s consolidated EBITDA margin would be 16.6%, instead of 20.2%, reconciling it. Rafael Pinho: Okay. It is exactly because I believe that this shouldn’t be part of the result that I wanted to confirm it. My adjusted margin here would be 16.6%. Alceu Duílio Calciolari: That’s correct. Wilson Amaral: That’s why we are reaffirming our guidance of between 16% and 17%, Rafael. That’s correct. Rafael Pinho: Okay. If we have time, I would like to ask another quick question: regarding the new debt with Caixa, I understand that this debt was basically classified under the SFH, even the cost of TR + 10% for units up to R$500,000 is in line with what we see for the SFH. Why not classify this under regular SFH debt? Won’t this impact your covenants? I already heard you say that there is still room for another R$600 million without impacting the covenants. But since the covenants don’t include SFH, why not classify this under SFH with Caixa? Alceu Duílio Calciolari: 16
  • 17. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 You’re right. There are several instruments that Caixa makes available for this type of financing, but they don’t include the SFH, this SFH rate. It has FDIC, CRI and debentures. So, the instrument we can use to raise funds for project financing with Caixa Econômica FGTS funding is the debenture. Then, since you have clauses, debenture covenants in our past issue that determine a certain covenant excluding SFH projects, not including debentures that finance projects, you create a problem. Recently, we renegotiated our debentures for a lower covenant. That was in 2Q, I don’t know if you remember. We had a covenant in the absolute amount of R$1 billion. It didn’t make any sense, it had been established years ago, but we had to renegotiate our debentures. At that time, when we renegotiated the covenant of that debenture, we adjusted one of the covenants that established that it was net debt minus SFH funding. We included ―net of SFH and project financing,‖ regardless of the instrument. So, what will we have to do in the future, if we have a new debenture issue? The same thing. We will have to adjust the clause to say, ―Everything that is project funding, regardless of the instrument, SFH or debenture, must be excluded.‖ And that’s what we’re going to do in the future, but it’s not with Caixa that we do that, it’s with other creditors and other debt instruments that we have. Rafael Pinho: Okay, that’s clear. Although it comes in the form of debentures, it doesn’t count. Excellent. That answered my question. Thank you and have a nice day. Leonardo Zambolin, Goldman Sachs: Good morning, everybody. I have a question about the gross margin. The Company’s consolidated gross margin was slightly lower than, for example, Tenda’s gross margin. I understand that Tenda does not account for a significant share of revenues compared to Gafisa’s regular projects. So, my question is mainly related to what we should expect from now on in terms of gross margin. Do you think that the gross margin of earlier launches has improved – especially concerning Gafisa and AlphaVille products? I would like to know if this has more to do with the fact that you are focusing on inventory sales, because when I look at table 21 of the earnings release, I can see that the inventory is relatively new, approximately 70% is up to 30% constructed, and the number of finished units is very low compared to total inventories. So, I would like to know if the higher sale of inventory has impacted this slightly lower consolidated margin. Thank you. Alceu Duílio Calciolari: Rafael, good morning. One thing that you always have to do – and this is important – is that when you look at gross margin, for any evaluation, try to exclude the interest. And the interest is there, included in the EBITDA reconciliation. You know that we have interest capitalization, and that’s important. Gafisa capitalizes much more interest than Tenda. So, if you look at the consolidated margin without interest and therefore, without the interest capitalization, the margin in the quarter would be 31.6%, and there’s a much greater impact on Gafisa, not Tenda or AlphaVille, because they don’t have debt, or have much less debt than Gafisa. So, that’s the margin impact that you have to disregard or adjust when you make the comparison. 17
  • 18. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 About improved margins, as you mentioned, we are actually expecting better margins in our new launches. And part of this margin, which is already reflected in the income one way or another, corresponds to those finished or almost finished units that we sold during the first half of 2009. A good part of it stayed behind, some almost finished units remained in 3Q, and we still had inventories at the beginning of the year. I believe we mentioned that in our previous conference calls. Obviously, we have to comment on this, if you look at products that we still have in inventory that we launched in 2007 and 2008, today we have to look at our prospects for recovery of the prices of these products to achieve a better margin. Products in inventory. So, we are working on that. We are expecting this in the coming months: some price recovery, both for products we’re launching, new products, so you will see an improved margin, and of those products in inventory and under construction. Why is that? Because consumer confidence is coming back. You see this sales velocity that we have achieved… We are achieving that and seeing some improvements in the price of products in inventory. So, we do expect an improvement. But we don’t expect to see a sudden improvement. We expect a gradual improvement, especially in launches, luxury products, but perhaps not a very significant improvement in terms of inventory. Leonardo Zambolin: Duílio, another quick question: about this price recovery, is there a particular region where you can see more improvement than in others or it is a widespread phenomenon? Alceu Duílio Calciolari: This subject is interesting. I’m going to give you an example. I think that it’s a widespread phenomenon. Obviously, we are never going to base our expectations on one region – that’s the real estate business. But we launched in August – we have already mentioned this – in Aclimação, a product that we expected to sell at R$6,200 per square meter, but things turned out better and at the end it was sold at R$6,700, R$6,800. So, there is room for price improvement, especially as far as luxury products are concerned, and therefore margin improvement. That is widespread. Obviously, pressures increase as we speak about the lower income segments. If you look at Tenda’s operating segment, there is not as much room as there is in Gafisa’s – it’s different. Wilson Amaral: Leonardo, the impression that we get from speaking with buyers and brokers is that there is a widespread feeling, especially among people who are buying properties priced at R$300,000, R$400,000 or even R$1 million, that if they don’t buy it today for R$100,000, a year from now they will pay R$120,000. That is widespread. So, people obviously discuss it a lot, there is a large supply on the market, but it’s directly associated with interest rate cuts and investment opportunities in the financial market. And this has already happened, not only in Brazil, but in several countries. That is a process seen the world over. 18
  • 19. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 If we really enter this phase of sustainable GDP growth of 4%, 5%, with a horizon of at least five to ten years, and interest rates remain at their current levels, the real estate market will be significantly impacted by that. And if you consider that Brazil needs 1.5 million new homes each year – and this trend will continue until at least 2030 – I believe that’s a very good scenario for our business. Leonardo Zambolin: All right. Thank you. Operator: Thank you, ladies and gentlemen, this concludes the question-and-answer session for today's conference call. I will now pass the floor to the Company for its final remarks. Wilson Amaral de Oliveira: I would just like to finish this by saying that we are still optimistic about the future, especially for 2010, and I would like to convey to you the assurance that, due to the platform that we have built over the last three years, we are very well prepared to seize the opportunities that will present themselves in the future. I hope you will join us at our next conference call to discuss the end of 2009. Alceu Duílio Calciolari: Best regards to everyone and I will see you at the beginning of next year. Operator: This concludes today's conference call. Thank you all for participating. Have a nice day. ―This document is a transcript produced by MZ. MZ does its best to ensure the quality (current, precise and complete) of the transcript. However, MZ is not responsible for possible flaws, as the output depends on audio quality and participant clarity of speech. Thus, MZ is not liable for eventual damages or losses which may arise from the use, access, security, maintenance, distribution and/or transmission of this transcript. This document is a simple transcript and does not reflect MZ’s investment opinion. The contents of this document are the exclusive responsibility of the company hosting this event, which was transcribed by MZ. Please refer to the respective company’s investor relations (and/or institutional) website for further information and significant and specific terms and conditions related to the use of this transcript.‖ 19
  • 20. Conference Call Transcript 3Q09 Results – Q&A Gafisa (GFSA3) th November 6 , 2009 20