Gafisa SA (NYSE:GFA)
Q4 2009 Earnings Call Transcript
February 9, 2009 9:00 am ET
Wilson Amaral – CEO
Duilio Calciolari – CFO and IR Officer
Luiz Mauricio Garcia – IR Manager
Gordon Lee – UBS
Marcelo Telles – Credit Suisse
Good morning. Welcome to Gafisa’s conference call for the results of the fourth quarter and full year of 2009. With us, we have Mr. Wilson Amaral, Gafisa’s CEO, Mr. Duilio Calciolari, Gafisa’s CFO and IR Officer and Luiz Mauricio Garcia, IR Manager.
We’d like to 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 start the Q&A session when further information will be provided. Should you need any assistance, please dial star zero.
Before we begin, I would like to let you know that the teleconference will be related to the operational and financial result 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 our 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 over to Wilson Amaral. Mr. Wilson, you have the floor.
Good morning and thank you for joining us on our full year and fourth quarter 2009 conference call. I am joined here today by our CFO, Duilio Calciolari and our Investor Relations Manager, Luiz Mauricio Garcia.
Gafisa successfully navigated 2009 and this year has emerged as one of the strongest global economies in terms of growth potential. With a strengthened business structure, including three respected brands with a presence in all income segments, expanded geographic reach and a large land bank of 15.8 billion reais, we are poised to accelerate our launches over the coming years.
Unemployment rates as low as 7% continued real wage expansion and a renewal in consumer confidence during the fourth quarter underpinned strong demand for housing in all segments that approached pre-crisis levels. As a result in the fourth quarter alone, we launched and sold over 1 billion reais, a record quarterly high and almost double the year-ago period.
We also exceeded our expectations for sales for the year and delivered solid operating margin expansion up from 14.9% in 2008 to 17.5% for 2009 without considering Tenda’s goodwill and net of provisions, 50 basis points over 2009 guidance.
Looking forward, we expect the favorable operating environment enjoyed by homebuilders during the latter part of 2009 to continue to prevail in 2010 on the basis of strong fundamentals.
Gafisa will benefit from what is expected to be sustainable GDP growth at a rate of over 5% per year as well as robust public and private financial structures supporting mortgage growth and the building sector. In the next year, we expect to continue to drive leadership in our sector while transforming this company into a national powerhouse by launching developments totaling between 4 to 5 billion reais.
Mortgage lending capacity from both private and public sources is ample, highlighted by Caixa Econômica Federal’s current 2010 FGTS budget of 24 billion reais, some 25% higher than granted in 2009, as well as an additional 6 billion reais for corporate debentures. While there is not yet a commitment to expand Minha Casa Minha Vida program, we are all working to extend the Government’s support to this program beyond 2010.
With the full integration of Tenda, we now have a streamlined corporate structure and while we did not anticipate some of the hurdles encountered in this segment during 2009, which were exacerbated by a global economic downturn, we are confident that we will see substantial improvement in both top line and operating performance within that business in 2010. And it will become an important engine of growth moving forward.
Now, let's turn to slide four, so I can give you a snapshot of some of the key financial achievements of the year and fourth quarter.
I am pleased to say that we not only achieved, but exceeded our objectives for the fourth quarter. In the final quarter, sales grew by almost 80% as compared to the fourth quarter of 2008, reaching a record quarterly high of just over 1 billion reais.
For the full year, we achieved 3.24 billion reais, just exceeding the top end of our guidance range. Launches also rated 1 billion reais for the quarter, bringing the total for the year to 2.3 billion reais, which is in line with our strategy to reduce inventories in 2009.
It's also important to highlight that our adjusted gross margin continued to show improvement and reached almost 35% in the fourth quarter '09. EBITDA adjusted for non-cash stock option expenses was 174.3 million reais, 112% higher than the fourth quarter of 2008. Thanks both to the strong revenue growth and improved operating profitability.
Our EBITDA margin for the year expanded to 20%, some 274 basis points higher than in 2008. In fourth year of 2009, EBITDA for Tenda's goodwill and net of provisions reached 529.9 million reais, with 17.5% margin or 50 basis points higher than the guidance for 2009.
Our adjusted net income margin improved to 8.1% in the fourth quarter '09 from 7.8% in the fourth quarter of 2008. And our full year earnings per share also improved, already considering the outstanding shares after Tenda's merge, showing the progress of good decisions that is just starting to show off the benefits for our shareholders.
Turning to slide five, I would like to go over some of the recent and most important development during the quarter. At the end of the year, Tenda and Gafisa’s shareholders approved an increase by Gafisa of its stake in Tenda from 60% to 100%.
Tenda is now operating as a wholly-owned subsidiary which we expect it to be result in further scale advantages and reductions in costs and SG&A expenses as we fully integrate with back office and management systems.
We have retained Tenda’s dedicated brand manager, differentiated retail infrastructure and innovative, low-cost construction methods. We also reported less quarter debt. We expected to close an additional 600 million reais debenture with Caixa Econômica Federal by the end of the year.
We closed that transaction on December 10. While much focus continues to be on the lower end of housing demand, we continue to see very strong demand from the middle and mid-high segment and expect this trend to grow as the economy continues to improve.
The Gafisa and Alphaville units together sold over 670 million reais during the quarter, logging sales velocities of 23% and 44% respectively. A majority of Alphaville launches and sales continued to occur outside of the markets of Sao Paulo and Rio de Janeiro.
A diversified portfolio product in our geographic reach have always been competitive advantage of Gafisa. Today, Gafisa’s mid/mid-high products accounted for 58% of pre-sales, while Tenda’s affordable offerings represented 42% of pre-sales.
Four years ago, Gafisa represented 100% of the company’s revenue sales amount. We are now present in 21 states and 100 cities with approximately 188 developments involving 310 phases.
Finally, I would like to announce that we intend to proceed with a follow-on equity offering worth an estimated 1 billion reais. Today, I talked about tremendous opportunity we see and as shown our ability to grow the top line profitably.
A follow-on offering will afford us the opportunity to comfortably fund our business objectives over the next few years while enhancing our current capital structure and M&A opportunities.
Slides six and seven provide an update on Caixa’s progress and our execution capability. With a national presence and designation as a Caixa Bank Representative in six regions. Gafisa’s Tenda subsidiary is well-positioned to leverage this relationship with CAIXA for continued growth in the low-income segment.
In 2009, Tenda contracted 5,114 units and has submitted over 25,000 units that are now under Caixa’s analysis. With a goal of 1 million new homes to be added for this segment, Caixa is well on its way to achieving its goal of one million new home by the end of 2010 and may even reach that objective earlier.
Some 71% or 714,000 units as of December 2009 of the total planned units are already under analysis. Over 275,000 units have been approved since April 2009 when the problem was announced with over 91,000 approvals coming in December alone. They are now moving at a rate of approval of over 4,900 units per business day. With the acceleration in approval rates and demand overall from homebuyers, Gafisa has stepped up its institution capability.
On slide seven, you can see that we completed 152 development or phases representing a total potential sales value of 1.5 billion reais which was in line with their requirements for 2009. 130 of them were constructed under the Tenda brand.
Moving on to slide eight, one of our key competitive advantages is our high quality diversified land bank. We currently have 383 different projects or phases across 21 states with over 47,000 units, Tenda represents about 52% of the potential 92,000 units. Just over 50% 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, we continued to operate under this philosophy while in the fourth quarter, we aggressively launched new development, new land with the prevailing demand.
Slide nine, shows the new launches for the fourth quarter ‘09 with a focus on types of unit sold as well as pre-sales by unit price.
Total launches for the quarter was 1 billion reais with Gafisa representing 58%. 57% of the Gafisa's launches were for unit prices below 500,000 reais, while nearly 75% of Tenda’s launches were for unit prices at/or below 130,000 reais. With the new launches and attractive inventory from previous occurred launches, pre-sales reached over 1 billion reais.
60% of the pre-sales of Gafisa's unit were priced at/or above 500,000 reais, while units priced at below 130,000 reais corresponded to 81% of Tenda's unit sales. The Sao Paulo and Rio areas continue to represent a majority of launches in unit sold. However, areas outside these markets have made strong contributions and represent 38% in terms of units launches and 36% of the pre-sales value.
Moving on to slide 10, let's take a closer look at inventory and sales velocity. During 2009, we were able to reduce our inventory following the company’s strategy to establish in the beginning of last year. At the beginning of Q4, our total inventory represented 2.8 billion reais. We launched 1 billion reais and sold approximately the same amount. We also make some adjustments in our inventory.
In the case of Gafisa and Alphaville, a positive impact in inventory prices during the fourth quarter '09 of 102 million reais. In the case of Tenda, our most recent analyses indicated that a portion of the inventory released in the third quarter was not ready to be sold. Accordingly, we adjusted Tenda’s inventory blocking, an equivalent of 233 million reais.
Overall sales velocity was 28.6% with the strongest performance coming from Alphaville at 43.7%. Tenda also allowed it sales velocity of 32% for the quarter. We had a strong quarter and already seeing a continued strong demand for 2010. We look forward to see many of you on our upcoming road show.
Thank you and now let me turn it over to Duilio.
Good morning, everyone. As Wilson mentioned, we turned in a very strong fourth quarter and solid full year results which reflected contributions by all segments of the product portfolio.
On slide 12, you can see that we continue to book solid sales in both Gafisa and Tenda's segment. 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 fourth quarter, the backlog of results to be recognized under the Percentage of Completion method exceeded to 1 billion reais, a 5% increase from the fourth quarter '08 and similar amount as compared to the third quarter '09.
Turning to slide 13, integrating Tenda into Gafisa has begin in the first quarter '09 and operational, commercial and administrative areas started to work together. Due to that, we are in line with SG&A on a consolidated basis and as you can see we have some improvements in the first quarter '09, when SG&A over the revenues dropped to 14.9% from 15.2% in the first quarter '08.
More important than is the expected synergies to be achieved in the coming quarter through shared back office functions, leveraging office infrastructure and accelerated implementation of systems such as SAP across Tenda's operations, which actually results in a better rate of SG&A over top line.
Well, the full-year analysis, we cannot compare SG&A with Launches and Revenues because expenses do not include 12 months of Tenda's operation in 2008.
Slide 14 gives you visibility to our financial position. On December, 2009, Gafisa had consolidated cash and cash equivalent of greater than 1.4 billion reais, which was 30% higher than what the company had at the end of third quarter '09.
And while, our debt improves over the period, primarily relates to the high favorable price of the debentures. Our cash burn came to 348 million reais for the quarter, mainly due to substantial increase in launches, sales, land acquisitions and construction activity at the company.
Long-term debt now represents 74% of our total debt of 3.1 billion reais, with so much use through 2013. W remain comfortable with our net debt direct ratio of 84%, excluding cost of finance debt. This ratio reached only 13%.
On top of that, the equity planned offering will create significantly more room for continued growth.
Moving onto slide 15, as mentioned earlier, we plan to launch follow-on primary equity offering in the amount of approximately of 1 billion reais in the coming weeks.
The offering will allow us to comfortably fund our business objectives over the next few years as well as reinforce our capital structure. Proceeds include for land acquisition 35%, working cap 25%, launches 20% and M&A activity 20%.
Slide 16, you can see our plans for this year. We are announcing it for our complete strong economic climate, our ability to capitalize on our business structure we have in place in expectations for operating profitability.
We expect to launch projects totaling 4 billion to 5 billion reais during 2010 of which 40% to 45% will be dedicated to the affordable entry-level segment through Tenda. In 2010, we also expect to improve in our consolidated landbank reaching between 18.5% to 20.5%.
Finally, it was to mention that Gafisa shares continued to be the most liquid in stock list over 105 million reais on average trade daily in the last three months and we remained the 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.
Thank you. We would now like to go to the question-and-answer session. (Operator Instructions) Our first question comes from Gordon Lee from UBS. Please go ahead.
Gordon Lee – UBS
Hi. Good morning. Two questions. First on the, on the Tenda inventory adjustment, I was wondering whether you think there is a chance some of that inventory might come back, once you make certain adjustments with the projects or whether you think that is project that this will come back to the inventory and then the second couple of question on your guidance for 2010 launches. How much of that is dependent upon the equity offering and how much you think you will be able to raise it, it didn’t have that equity offering or in case if you’re not including it, how much incremental launches could you get by raising the money to the inventory. Thank you?
Hi, Gordon. This is Luiz speaking. Regarding Tenda, that unit that you are seeing now are Tenda’s blocked units. I believe units is a matter that we are focusing to see to the beginning of the acquisition of Tenda. I don’t know if you are aware about that but when we bought Tenda, Tenda has approached to launching units, to launching products and when they launch products even within those products under phases that no more take three, four or may be two, three years. They announced the whole launches and then entering back into the size of the inventory. What we haven’t realized in this third quarter is that we had some units that could be released for sales and then we released that units for -- equivalent to 400 million reais in the third quarter.
We more deeply analyzed that what we did in the last quarter. We are sure that some units are not direct for sales. So, we brought again. We expect to go around there. This matter will be totally showed during this year, but even though it is having this matter under analysis. We lease again those units and we will present as released of the units, not as launch units. So it's a matter of being ready or not to be sold and we are managing these units along the year, especially in the third to fourth quarter.
This is a problem, we are addressing and we expect to sold along 2010. Regarding the guidance for 2010 that you asked us, the equity that you are doing now, planning now is much more important for 2011, 2012. Just to have an idea, we are giving our guidance for 2.5 billion reais and assuming that if you wouldn't have this equity offering, for sure we would be more conservative but we believe that we could leave at the least the fall of the guidance in 2010.
The problem would be 2011 because we need to buy land. And as you can see the procedures that we asked, assuming for land acquisition is about 35%. 35% is about 350 million reais.
If you are assuming that you can have cost of land between 10 to 15%, we are discussing an acquisition of new land about 3 to 5 million reais, a billion reais for 2011, '12. So, there is a -- yes you can go ahead with ratio net debt equity offering working with more conservative approaching launches becoming along the product, the guidance but 2011 would be a different year for us because no land, enough land would be available for 2011, 2012.
Gordon Lee – UBS
That's very clear. Alceu, just a follow-up on the Tenda question. When you said that you after reassessing in the fourth quarter, you felt the units were ready to be released, did that because you weren't comfortable with demand for the type of units or is it more on some sort of technical issue?
It's much more of technical issues related to the development. Of course, we might have some east or west [ph] demand but we see much more a technical problem in terms of approval, in terms of legalization especially on this side of equation. We don’t see problem with demand in the low income, Gordon. Actually, what you can see in Tenda is that we are reducing -- the reduction that we are having now in inventories is huge and we are much focused now and acquiring more lands in accelerated process of approval. So no problem with the demand side.
Gordon Lee – UBS
Perfect. Thank you very much.
Thank you, Gordon.
(Operator Instructions) Our next question comes from Marcelo Telles from Credit Suisse. Please go ahead. Mr. Telles is your phone on mute.
Marcelo Telles - Credit Suisse
Marcelo Telles - Credit Suisse
Thanks very much. Hello, everyone. I just -- I have a follow-up on the question actually I did on the Portuguese call in May regarded the margin at Tenda. I want to know if that gross margin, you know, that in May, I think was 32 -- 32.8% in the fourth quarter. Does that includes the cost of the SFH financing of the margin and also if the guidance in terms of EBITDA margin for 2010, if you are excluding the cost of SFH financing as well? Thank you.
Marcelo. The margin -- the gross margin that they mentioned for Tenda will not exclude when I mentioned that we -- I did not exclude the SFH cost but in Tenda, this number is very small. I don’t have it right here but I can send to you. So those 32.8% that they mention is with their interest expense included. Okay.
Marcelo Telles - Credit Suisse
But the number is very small in the case of Tenda.
Regarding the guidance Marcelo, 18.5 to 25 are adjusted with financial expense including SFH, working capital and capitalizing with planned before 2010.
Hey, Marcelo, this is Alceu. We can compare directly the EBITDA from '09 with '10. Okay. We did exactly the same adjustments during the year 2009. So we are expecting 2010 growing from 17.5% in terms of EBITDA margin to some between 8.5% to 20.5% something around 200, 300 basis points in -- during the year 2010.
Yeah. Just to another comment, Marcelo, table 14, you will see -- this reconciliation, EBITDA reconciliation and we are showing 17.5% in 2009. It is the same way that we are giving guidance for 2010. Okay.
Marcelo Telles – Credit Suisse
Excellent. And thanks very much and just one follow-up question actually now regarding land acquisition, of course, to be part of the proceeds you are going to raise, you probably apply for land acquisition. But in general terms, I mean, how much they can acquire landing as you see swaps, I mean, have you seen an increases in swap acquisitions in over versus cash acquisitions, what percentage do you think it’s a visible number first to work with. Thank you.
Yeah. Myself Wilson. Well, it depends on the brand or the project. Considering the Alphaville project is 100 percentage swap is something around 98, 97%. So it’s not a problem. In terms of Tenda, it depends on the region that we are right now detaining our business plan for 2010 and we are considering something around 30 to 35% in terms of swaps for Tenda products.
Marcelo Telles – Credit Suisse
Excellent. Thanks very much.
Thank you. (Operator Instructions). We'll now pause for a momentum to allow participants to enter the question queue. We see no parties in the queue. We’ll now turn the conference over to our speakers for any final closing remarks.
Okay. Just like to thank you for participating in our conference and again we look forward to see many of you on our coming road show. Thank you very much.
Thank you, everyone.
Thank you. The conference is now concluded. Thank you for your participation. You may now disconnect your lines and have a great day.
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