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Gafisa S.A. (NYSE:GFA)

Q4 2013 Earnings Call

February 27, 2014 9:00 am ET

Executives

Alceu Duilio Calciolari - Chief Executive Officer, Member of Executive Board, Coordinator of Finance Executive Committee and Coordinator of Investment Executive Committee

Andre Bergstein - Chief Financial Officer, Investor Relations Officer, Chairman of Ethics Executive Committee, Member of Finance Executive Committee and Member of Investment Executive Committee

Rodrigo Osmo - Former Chief Financial Officer and Member of Executive Board

Analysts

Nicole Hirakawa - Crédit Suisse AG, Research Division

Rafael C. Pinho - Morgan Stanley, Research Division

David Lawant - Itaú Corretora de Valores S.A., Research Division

Frederico Mendes - Deutsche Bank AG, Research Division

Eduardo Silveira - Espirito Santo Investment Bank, Research Division

Luiz Mauricio Garcia - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

Operator

Good morning, and welcome to Gafisa's Earnings Release Call for the Fourth Quarter and Full Year of 2013. With us on today's conference call are Duilio Calciolari, Chairman of Gafisa, CEO; Andre Bergstein, CFO and Investor Relations Officer; Fernando Cesar Calamita, Director of Planning and Control; Sandro Gamba and Rodrigo Osmo, Executive Officers of Gafisa and Tenda, respectively.

We'd like to inform you that this presentation is recorded. [Operator Instructions]

Before beginning, we'd like to inform you that this conference call will address Gafisa's financial results for the fourth quarter and -- 2013 and the full year. Based on the information currently available, management's statements may involve risks, uncertainties and may make a reference to future events. Any changes in macroeconomic policy or in legislation and other operating results may affect Gafisa's performance.

Okay, Mr. Calciolari. Please proceed.

Alceu Duilio Calciolari

Good morning, and thanks for joining us today. I would like to start by stating that we're very pleased with the results achieved in the year of 2013. The net income of BRL 867 million marks the conclusion of our turnaround plan which began in 2012.

Well, recapping our objectives at that time were clear. We had to reduce our debt and restrict the exposure to unprofitable markets and businesses. This process has evolved positively on several fronts. Among them is the implementation and consolidation of a new organizational structure, segmented by brands, improvements in margins and cash generation, culminating with the sale of 70% stake in Alphaville, which unlocked significant value for Gafisa and contributed to the reduction of company's leverage and adjusting its capital structure.

Confident that the initial phase of our plan was well executed in 2012, in 2013 we developed a plan aimed at achieving a better balance between the generation of cash, investments, de-leveraging and profitability in order to begin a new cycle of sustainable growth for the company.

We ended 2013 pleased with the operational and financial results achieved in the period. The volume of launch has reached BRL 2.9 billion, in line with the guidance. And we sold BRL 2.6 billion, reflecting a healthy market.

Throughout 2013, the reduced operational complexity, coupled with Gafisa's strategic consolidation and the resumption of Tenda launches, we contributed to a gradual recovery in the company's margins. The gross margin, which were 24.4% in 2012, reached 31.2% in 2013.

Cash generation was also a highlight in 2013. The company Gafisa and Tenda recorded cash generation of BRL 668 million in 2013, reaching free cash flow of BRL 97 million in the period.

On the closure of the Alphaville transaction, we had a cash inflow of BRL 1.5 billion, which contribute significantly to the fourth quarter of 2013 net income, which reached BRL 921 million and resulted in a year end figure of BRL 867 million. With this, we were able to adjust the company's capital structure, reducing leverage and reaching a net debt equity ratio of 36%.

The proceeds of the transaction will be used as follows: BRL 700 million to amortize corporate debt that will mature by December 2014; BRL 130 million for interest on capital; BRL 32 million for supplementary dividends to be paid in 2014; BRL 150 million to repurchase 32 million shares, underscoring Gafisa's confidence in the company's value and future prospect.

At the end of 2013, we finalized the development of the business plan for the 2014-2018 period, and we set the main guidelines, such as the expected size of the Gafisa and Tenda operations, debt policy profitability and, most importantly, our commitment to capital discipline and shareholder value generation, which are reflected in the guidance already released to the markets.

We began 2014 on a strong footing, having benefited from all the initiatives implemented in the last 2 years. The reduction of our operational complexity, the adequacy of our cost structure and expenses, the new operating model at Tenda, and the consolidation of Gafisa's strategic positioning, coupled with the financial flexibility achieved by the sale of the stake in Alphaville, are all important steps in preparing the company for the next few years. As a result of this process, on February 7, 2014, we announced that we started studying [ph] a potential separation of the Gafisa and Tenda business units into 2 public and independent countries. The separation would be the next step in a comprehensive plan initiated by management to enhance and reinforce the ability of both business units to generate more value. The management team that executed the turnaround process is now set to lead Gafisa and Tenda in a profitable and sustainable manner, as the brands embark on a new phase in the company's history.

Finally, I would like to remind you that this year, Gafisa celebrates its 60th anniversary, a milestone in the history of the Brazilian real estate industry. There have been so many achievements during this time. More than 100 -- 1,100 projects. But more important is the intensity, determination and passion that we have to continue to move forward.

Congratulations, Gafisa.

Now, we would like to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ms. Nicole from Crédit Suisse.

Nicole Hirakawa - Crédit Suisse AG, Research Division

I'd like you to comment on cash generation. I would like to understand how the impacts happened in cash generation. Will this -- will we have a neutral cash generation this year? Also, the trends for gross margin even adjusted due to accruals, would it make sense for us to think that this will continue during the year?

Alceu Duilio Calciolari

Nicole, concerning the question, the first cash generation, we had strong volume of delivery, almost 50% of the deliveries, 6,000 units, happened in the last quarter -- delivery of the apartments. And now, we're very well-adjusted, and this allowed us to have a strong operational cash flow. To give you an idea, Gafisa, for example, in the last year, we had BRL 160 million in the loans passed through the bank. So this helped us have this better cash generation. But this does not change forecast of the neutral cash generation for next year. So we continue with the current. We have the acquisition of lands. We will continue at the same rhythm, similar to what we had this year. Also construction in line, so this will not change. We will not have great changes in 2014. Concerning gross margin. Yes, we had a gross margin that was higher in the last quarter. We were having a gradual increase in gross margin during the year. We know that this gross margin with interest, 31.5%, we had an evolution from 2012 to 2013. This is aligned with what we have been having in terms of a gradual recovery. Because of the concentration of projects in São Paulo and Rio de Janeiro, we had very little to deliver in other markets. It's almost over. And Tenda, although, being small in 2013 in terms of new projects, and now, with much better margins, also -- Tenda also begins to improve. There is always an effect that is not recurring. For example, this quarter, we reversed additional costs for some projects where we had accruals. In the past -- due to lack of visibility in the past, we made accruals for some projects and as we get to the end of these projects, we don't have these costs, so we reverse these accruals. So this helped margins. There is no doubt that quarter-by-quarter, if you look at the 2 years and compares, removing one or another reflecting each quarter, we have seen this evolution, this recovery. And not considering these effects, we can consider a gross margin in line with this evolution.

Operator

Our next question comes from Mr. Rafael Pinho from Morgan Stanley.

Rafael C. Pinho - Morgan Stanley, Research Division

I would like to understand more this -- the -- your capital structure. If we consider everything that you said in the release in terms of dividends, buyback, plus the payment of BRL 700 million of debts, we'd have -- we will a capital structure of 44%. You mentioned that you want to get to 50%, 60% this year. Andre, do you see a scenario to have this expansion? Do you see this volume? Do you -- or would you be more cautious? Would you have some information to make it more cautious? So how are you thinking about the capital structure in the future with the macroeconomic scenario?

Andre Bergstein

Well, we established, as a guideline for the company, that it can operate, it should operate in a consistent way with the leverage around 60%. This doesn't mean that I'm saying that there will be -- I'm not saying that there will be a time when we'll get it. This is forward-looking guideline, and we see this as healthy for the company. In fact, we had a re-evaluation of the 30%. This made leverage lower than what we had said when we closed the operation of Alphaville. We had an expectation of 48% after the re-evaluation. This number, with stronger operations, was lower, so we got to 36%. We have also interest on our own capital, which were paid, but also dividends. We will take this to the assembly after [ph] the repurchasing of shares. And we're clarifying, we had a balance in Tenda, so we closed and we opened in Gafisa. Now, Gafisa has reserves, so we opened this program in Gafisa with the same balance, 17 million, since we had already executed 15 million of the program we approved at the end of December. So at the same time, I continue saying that operational generation is neutral this year, so [indiscernible] we are expecting this cash. So we continue with the same guideline. I would say that there will be a time this year where we're beginning a little lower. The guidelines, the assumptions approved, continued the same. And during the year, we will see how things will behave. And I believe it's important to look forward and say this is the healthy situation we estimate, 75 [ph].

Operator

Our next question comes from David Lawant from Itau BBA.

David Lawant - Itaú Corretora de Valores S.A., Research Division

I have 2 quick questions. So first, I'd like to ask about Tenda, especially looking at the projects of the legacy. We see a considerable drop. We have seen a drop at the end of -- from third to the fourth quarter. The drop was strong, BRL 106 million to BRL 69 million . I'd like to know what do you see for the future? Is there more space to drop -- quick drops? Or will it continue at this level for some time? The second question of detail, when you talked about reversing accruals, you mentioned that you still have BRL 8.9 million that can be reversed in projects. And I'd like to understand, are these projects that haven't been concluded that you have identified that there is a buffer and you will be able to reverse accruals?

Alceu Duilio Calciolari

[indiscernible] I'll answer your first -- second question, then Rodrigo can answer the first. Concerning the second, at the end of 2011, we made accruals with -- for some additional costs in projects where we had less visibility. In these 3 years, we adjusted many things. And in some projects, this BRL 9 million are Tenda projects that will be concluded this year. We have one that will end in 2015. And this way, there is a buffer. This is a buffer for projects that have a certain volume. We have told you the costs of legacy projects from Tenda. We had 40 [ph]. And so in some projects, we leave this buffer where we still have a certain lack of visibility. Things are going well. It's more a security-type of buffer. And as we conclude these projects, we reverse the accruals. If we have to use the accruals, we'll use them. But it's much lower than the number we had in the past, and this has to do with the conservative view that we have for some projects in Tenda that haven't been concluded.

Rodrigo Osmo

Okay, concerning contracts in the first quarter, contracts that were canceled. We had a considerable increase of contracts canceled. We had many deliveries in the fourth quarter of last year, but the trend is to continue with a reduction in canceled contracts. So in the second quarter, we should, once again, see this trend with values that are lower than in the fourth quarter.

Operator

Our next question comes from Mr. Fred Mendes from Deutsche Bank.

Frederico Mendes - Deutsche Bank AG, Research Division

I have 2 questions. When we look at M&A expenses, an increase of BRL 15 [ph] million, I'd like to know what is the reason for this increase? Second, when we look at Tenda, you have a gain of BRL 15 [ph] million. Is this the sale of a plot of land? Is it something from Alphaville? And in Gafisa's year-end balance, you recognized for BRL 475 million in gains from Alphaville, but in Gafisa, you have BRL 490 million, a difference of BRL 25 million. Does this have to do with the sale of a plot of land or?

Alceu Duilio Calciolari

Go ahead Andre.

Andre Bergstein

Concerning M&A, we show this at the report. At the end of the year, when we close our year-end report, we look at all the metrics that we have established as a guideline for bonus. So in this quarter, always in the last quarter, we make an adjustment in the accrual for bonus to see how we close the year, the metrics and consequently, how we will estimate the payment of bonuses. This increased the D&A in the last quarter. Now, if you exclude this additional amount, the accrual that we made, D&A fell. It fell 6%, 7%. The trend during the year, there was a drop within what we had said, as we had said, concerning the reduction of complexity. Now concerning assets available in Tenda. Tenda, of the 70% we sold in Alphaville, 20% was in Tenda. So we acquired Alphapar on July 3rd. And in the last quarter, remember, until the third quarter, we had Alphaville as an asset available for sale. So what you noticed in the result of Tenda assets available for sale, has to do with the 20% participation that Tenda had in Alphaville and it sold this participation to Blackstone. Concerning the third question, I must check what your -- the difference in the result of the -- or the results in Alphaville, right?

Frederico Mendes - Deutsche Bank AG, Research Division

Yes. When you look at the beginning of the release, you say that the gain in the sale, 70%, BRL 435 million. But when you look at the consolidated year-end report, BRL 488 million to be exact. So why this difference? If I add up what you have in Tenda and in Gafisa, it becomes even larger, closer to BRL 30 million, BRL 40 million in difference. Was there anything else that we haven't seen concerning Alphaville, maybe a sale of a plot of land or something?

Andre Bergstein

Now, concerning Alphaville, that's it. The nets [indiscernible] Alphaville this year had assets available for sale after evaluations and we demonstrated this in many lines, so this generates some confusion. I will check this and I'll come and explain to you.

Operator

Our next question comes from Mr. Eduardo Silveira, Banco Espirito Santo.

Eduardo Silveira - Espirito Santo Investment Bank, Research Division

I have 2 questions, the first has to do with the guidance for general administrative expenses. Does this number include the payment of bonuses? If we look at 7.5% in 2014, it will be BRL 170 million of D&A, and 34 [ph] in 2013. Does this include payment of bonuses? Or this has to do with the separation of Alphaville? The second, I'm trying to make a conciliation of the recurring profits without the effect of Alphaville. In the release, you say that the re-evaluation 30% -- of Alphaville has an impact of 127.8 on one side, 106 [ph] on the other. So here, you would have BRL 50 million in deferred and not BRL 20 million as you're saying. So am I missing something? So what is the current deferred tax, without the effect of Alphaville?

Andre Bergstein

Eduardo, concerning the first point when we made the guidance, 7.5%, we were talking only about Gafisa. Tenda we put forth -- we placed in 2015. So 7.5% -- with this -- you won't get to this number with 7.5%. In Tenda this year, we will have a percentage D&A on launches that is superior to 7%, 7.5% for 2015. We're in this space. We're studying. We're making the studies of the separation to separate Gafisa from Tenda, with -- having 2 independent companies by the end of the year. We have been working on this. Since the D&A can be adjusted, we don't see great effects and we continue using this guidance of Gafisa this year and Tenda next year.

Eduardo Silveira - Espirito Santo Investment Bank, Research Division

But it includes bonus?

Andre Bergstein

It includes bonus.

Eduardo Silveira - Espirito Santo Investment Bank, Research Division

So let's say this consolidated of BRL 3 billion for 2015, 7.5%, 225 [ph]. So you're saying that in 2015, your D&A will be lower than in 2013 because of the bonus, is that right?

Andre Bergstein

Yes, that's right. And the expectation, reducing complexity as we are doing, and nominally, there will be a reduction in D&A. That's it. Lower, yes. In 2015, we should have this 7.5%. I'm using these numbers as a guidance for next year, and we will see this only at the end of the year.

Eduardo Silveira - Espirito Santo Investment Bank, Research Division

Another question, please talk about deferred ER, the revaluation of Alphaville.

Andre Bergstein

We had deferred assets and passes, but [indiscernible] was BRL 20 million. We had some movements apart from the BRL 70 million mentioned in the release. And in the year-end reports, we had 127. As a result of deferred ER [ph] asset and past assets and liabilities due to the reevaluation. So the net for the year, the impact was BRL 20 million positive.

Eduardo Silveira - Espirito Santo Investment Bank, Research Division

According to the release, if I see the difference between 180 and the other, we'd have 52.

Andre Bergstein

32 million. Also, that had an impact on the net total to get to 20 million. And we can show to you how we got to this number.

Operator

[Operator Instructions] Our next question comes from Mr. Luiz Mauricio, Bradesco Bank.

Luiz Mauricio Garcia - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

Two points. Please talk about contingency. I didn't see the table of contingency that you have until the third quarter. We see an increase in the accruals for contingency. So what does the company expect in the future? The BRL 470 million in general contingencies that were many lines with accruals until the third quarter, with this increase of an extra BRL 42 million and the reversal of 32 [ph], how do you expect the trends to be for contingencies in the future? And the balance -- is there a balance in any other line that can be reversed in cost that haven't been incurred? How do you expect to have in the future, these contingencies? Should we have high -- do you believe we'll have the high numbers as in the fourth quarter? The second question, the sale of inventory. After 2 months of 2014, please talk about the performance. I know that January and February, normally, are weak months, but we see the inventory as being important, hence the number is high and we see an inventory that is high. This is an important aspect to improve the company's numbers since, as mentioned before, the cap -- in the capital structure, we see a lengthy time between the guidance being converted into return on investments. And this capital structure has this weights and high inventory. Please comment on this, especially concerning the performance of the sale of inventory.

Alceu Duilio Calciolari

Well, concerning contingencies, we have seen an improvement comparing 2012 with 2013. In operational expenses, we have this number and we had a reduction of 15% getting to 86 million. We had in the last quarter, the third quarter expenses, 28, in the last, 42. So at the end of the year, you have an in-depth re-evaluation, an in-depth analysis of contingencies. And there was one point we had an adjustment. We made a new conciliation in deposits for certain contingencies and accruals. This had an impact. It's increased a little. In general, we see this because of a better control with new payments, new money. This 2 years after we conclude a project, we still have some labor lawsuits, but this volume has dropped 15% in 2014. We should have a new reduction. Eventually, you'll have sometimes a larger labor lawsuit or something. You'll have some larger lawsuits that sometimes justify the increase that we have this year. Now if you think of the numbers as we improve control, this has gone down and will continue this way from now, onwards. In terms of inventory, what we see at the beginning of the year, not different from what we're used to seeing in January, February. We had more launches at the end of the year, but neither better nor worse than we see January, February. We have an inventory of other markets, real estate, that is ready or almost ready that we have sold in a consistent way in Gafisa and in Tenda that we have sold, but with a sales speed that is a little lower, for example, in Minha Casa and Minha Vida and also in projects in São Paulo. But we're constantly selling, so we will transform this into cash in 2014 and cash in 2015. We don't see sales problems. We only have a slower pace of sales. It's a good speed. These products in Rio de Janeiro, and also products in Minha Casa and Tenda.

Luiz Mauricio Garcia - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

In terms of margin, do you see a region where you could lower margins to sell faster? Do you see a region where this could be done? Do you have any initiatives? Or do you believe sales will have to continue slower?

Alceu Duilio Calciolari

Our feeling, Mauricio, in the last 2 years, we gave certain discounts this January that are certain liquidity, but this has to do with demand. Sales are slower. We have an efficient structure. We concentrated the management of these regions in a larger branch. So today, with the capital structure that Gafisa has, and you mentioned this, profitability in return, we believe that sales are slower. But we're looking more at profitability because this is important for us today. Profitability, we're looking more into profitability.

Operator

[Operator Instructions] Since we have no questions, we will pass the floor to Mr. Duilio for his final comments.

Alceu Duilio Calciolari

Well, I'd like to thank you all in this call. This is the last call on behalf of Gafisa on my part, more than [indiscernible]. Some with a lot of emotion, others, less. Now, we have a new phase, so we know the recent past was difficult. But now the company is already on the right track. I wish a lot of luck to Sandro, Rodrigo. It's my last report. We have a very interesting perspectives, and I'm very optimistic that the company has -- really, is now on the right track. Thank you.

Operator

The audio conference is being concluded. We'd like to thank you all for your -- for coming, and have a nice day.

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