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Gafisa SA (NYSE:GFA)

Q1 2014 Earnings Conference Call

May 12, 2014 9:00 AM ET

Executives

Andre Bergstein – CFO

Rodrigo Osmo – CEO, Tenda

Analysts

Enrico Trotta – Itaú BBA

Gustavo Cambauva – BTG Pactual

Nicole Hirakawa – Credit Suisse

Rafael Pinho – Morgan Stanley

Luíz Maurício – Bradesco

Eduardo Silveira – Banco Espírito Santo

Operator

Good morning, and welcome to Gafisa’s Earnings Release Call for the First Quarter 2014. With us today are Sandro Gamba, Gafisa’s CEO; Andre Bergstein, CFO and Investor Relations Officer; and Rodrigo Osmo, Tenda’s CEO.

We would like to inform you that this presentation is being recorded, and that all participants will be in a listen-only mode during the presentation. Afterwards, we will hold a question-and-answer session. (Operator Instructions)

Before we start, we would like to inform you that this conference call will address Gafisa’s financial results for the first quarter of 2014. Based on the information currently available, management’s statements involve risks, uncertainties and may make reference to future events. Any changes in macroeconomic policy or legislation and other operating results may affect Gafisa’s performance.

And now, we would like to ask, Mr. Andre Bergstein to take the floor. You may proceed sir.

Andre Bergstein

Good morning, and thank you very much for being with us today. We started this year 2014, motivated through the conclusion of the restructuring process of the company operations at the end of last year, which led to an important part of de-leverage and an improved capital structure.

We also generated significant value for our shareholders, with the payment of interest on our own capital in February, and the approval of complementary dividends in April, leaving to a combined yield of 11%. Analyzing the results of the first quarter, we note that the market conditions were stable and reasonably in line with the season of [indiscernible].

In the Gafisa segment, in this quarter we launched R$354 million, broken down into three projects; two in São Paulo and one in Rio. Net sales totaled R$187 million, 80% corresponding to inventory of those two launches. Pre-sales in next [ph] period reflects the concentration of launches at the end of March. The primitive point of this first quarter was the volume of sales terminations, which dropped 58% year-on-year, even with the high volumes delivered in the last quarter. This points to the better credit profile of our client base.

The Tenda segment, in view of the good performance of the projects launched last year according to the new business model, we launched in this first quarter four new projects with a total volume of sales of R$181 million, located in São Paulo, Rio, Bahia and Pernambuco. The volume of next sales contracted totaled R$52 million, impacted by a greater volume of termination of old projects, leaving total contract or quantity of deliveries in last six months, 5,000 units.

Our focus in 2014 is to grow in a profitable way, and at same time we owe the benefits offered by the new operating structure of the company. With reduction of the operating complexity and consolidation of the company, we have noted in the last quarter, an improvement to our profitability with the gross margin, before interest, totaling 30.5% in the first quarter of 2014 in comparison to the 22% year-on-year.

The improvement in this period of 12 months proves the success of the restructuring initiatives such as we implemented, and the growing contribution of our projects with adequate profitability. Thus, we have had growth in our two business units. In Gafisa, we went from a loss at São Paulo of R$50 million in the first quarter of 2013 to a profit of R$1 million in this first quarter. In Tenda, even with the reduction of 25% in its revenue in the first quarter ‘14 year-on-year reflected the period of transition between a conclusion of the legacy projects and the incipient along new projects, we managed to show a better performance of the growth margins and reduce the loss to R$37 million to R$43.9 million of the following year.

And essential elements of restructuring, which we carried out was to stabilize the company’s capital structure, selling our major shareholding in Alphaville, allowed us to reduce leverage and establish a liquidity position which is very comfortable. In this quarter, we had good cash position taking an operating generation of R$107 million and consequently generation of free cash of R$20 million. And this leverage measured by the net debt over stockholders’ equity ratio reported at 44.9% according to guidance.

Reiterating our commitment of value generation at the end of April, the company approved the distribution of dividend of R$33 million, which together with interest on our own capital paid in February amounts to R$132 million earmarked for the shareholders.

As far as the plans of separation, the Gafisa and Tenda’s business units into two independent listed companies, in this first quarter, we have already started splitting up some of the admin areas, and we believe that a good chunk of this process will be concluded by the end of the year.

When this happens, the units will be from an admin point of view working in an autonomous way, separate one from the other. And in parallel, the company is continuing to study alternatives to the separation of the two companies, evaluating issues, which has to do with the structure of capital, liquidity, fiscal aspects, tax, legal, ownership aspects and others.

With the recent conclusion of the turnaround process and in line with the study regarding the possible separation of the business units, on the second year, we had a change of the CEO of Gafisa, after 14 years of dedication to the company and a period of transition in this February, Duilio left the position of CEO, which was then taken out by Sandro Gamba. Sandro Gamba has been the CEO of the Gafisa business unit and had occupied many positions of leadership throughout 15 years.

Rodrigo Osmo remains the CEO of Tenda. We will keep the market informed about the separation process. And finally, this year we’ve started implementation of the business plan of 2014 to 2018, where we’re drawn our guidelines for the development of our business units like the expected size of Gafisa and Tenda’s operations, adequate leverage, profitability guidelines, and above all, our commitment with discipline of capital and value generation of our shareholders.

And now we may start our Q&A. Thank you very much.

Question-and-Answer Session

Operator

Now we will start our Q&A. (Operator Instructions) Please wait one moment while picking up the question. Our First question comes from Enrico Trotta from Itaú BBA. You may proceed.

Enrico Trotta – Itaú BBA

Good morning. Thank you for the presentation. Two questions. I’d like to know about other operating expense measures. You had an increase in judicial demands and expenses. So could you elaborate please? Is there a specific reason from Tenda or Gafisa, could you able to – I’d like to understand that. And secondly, could you talk a little bit more about non-recurrent expenses. In the backdrop of Gafisa, and so how much was this expense?

Andre Bergstein

Hello, Enrico. Regarding the operating expenses, R$25 million, right, that you’re referring here on the balance sheet or income statement. I saw that there is an increase of R$15 million or R$20 million. Regarding that demand for judicial is huge. This has to do with the division between Gafisa and Tenda, about R$15 million for Gafisa and R$10 million for Tenda. This might an increase for contingencies. The transfer between shares from [indiscernible].

You have some agreements which goes straight to the results, and demand was possible and we couldn’t solve in the first instance and then you have the labor costs. And the probably loss, first thing since the [indiscernible] so this was the difference.

As far as the question of the back-office to Gafisa. As Alphaville, since we concluded the transition at the end of last year, they began to work. It was already announced with transition so that they would have all the branch office in this year using Alphaville itself. And they began to do this during the first quarter, a good part of the structures have been migrated and are already in Alphaville.

And there are already all-in costs associated to that. You have to have some people left and you have to write to Alphaville others who had [ph], so Alphaville began to get the team together to really run the Alphaville back-office. So I don’t have it precisely. There are some extensive which has to do with consulting fee as well, which works hard with the process. It is a process that actually evolves well and quickly. And this comprises the recruitment selections, new people who enter the Alphaville. So basically these were the expenses which increased the G&A of Alphaville this quarter.

Enrico Trotta – Itaú BBA

Thank you very much, Andre.

Operator

Our next question comes from Gustavo Cambauva from BTG Pactual.

Gustavo Cambauva – BTG Pactual

Good morning. I would like to ask the sale terminations. You booked Tenda and the new projects, and with new business models, and a difference between the two and the legacy projects. I think that the sale was already made – or there was some question this quarter which led to the increase of the sales termination, or what happened there?

Andre Bergstein

Hello, Rodrigo is going to speak about this.

Rodrigo Osmo

Hello Gustavo. This is Rodrigo. Some things happened, specific tables further reached R$30 million of terminations of new sales. The first thing to clarify is that there will always be project terminations, because when we say that the sales are transferred, the transferal is a continuation of the sales process, it’s natural. It’s part of a [indiscernible] but sales and transfer are different moments of the process, and something can happen between one moment and the other.

And the moment between sales and transfer takes from two to three months. And something can happen, like the buyer can give up. So still terminations can happen. The level in the first quarter was not normal, not typical.

Gustavo Cambauva – BTG Pactual

What happened in the first quarter?

Rodrigo Osmo

The most important effect was the change vis-à-vis the formatting till up to September or October, the Banco do Brasil and Casa [ph] were working with 90% of financing of the value of the property. They would use up to 80%. And they geared until the end of the year for the companies to adjust. And adjust the plans that are in being filled to. So as you may note, as we spoke last year the number of terminations small could have little advantage on the plan, and at the beginning of the year. And the term expired alternative of those plans. So right now we are having an additional saving of 10% for terminated. So this was the main reason.

The second reason is [indiscernible] specifically, we began to work in an understanding with the leader. With the Banco do Brasil and with the first operation with the Banco do Brazil look to this. So the learning process of this operation generated the more terminations to begin with, but this level of R$30 million in terminations, more than 30% on the gross sales is much less than we expected.

Gustavo Cambauva – BTG Pactual

Rodrigo, a follow-up please. This change was not good for sales in those period, but do you think it’s going to be effect the affordability of your client? Will it be more difficult to say – what should be the impact from now on?

Rodrigo Osmo

We have not noted, but there is a little bit scope to fail, yes, which in this period 90%, while in the third quarter of last year, it was very good. Now it’s more difficult, but compared to the second or fourth quarter or towards the last year, it’s quite comparable to this quarter, but now as the Casa impact is in the Tenda lock [ph] price, it worked in the third quarter and then it came back at the end of the year. And now they are currently engaged in this, but they have squeezed credit a little bit for plans of the Tenda lock [ph] price.

So the amount of cash for actually total sales is more difficult. Nothing to worry. Nothing that puts the model at risk, that isn’t more difficult certainly.

Gustavo Cambauva – BTG Pactual

Thank you very much, and good morning.

Operator

Our next question comes from Nicole Hirakawa from Credit Suisse.

Nicole Hirakawa – Credit Suisse

Good morning. I have two questions. The first is a follow-up of the third question about the line item of other expenses. And it sounds that is a difficult to know, but can we have an idea of what is expected for this year? And the other question is the spin-off of Tenda. You said that studies are still being carried out, but on the other hand, you are setting this physical separation of the operations. So what has led to this worsening of say feel a little bit more difficult? Is there anything to going to change regarding the plan or we’re still off or nothing is continual [ph].

Andre Bergstein

Regarding the first question, we don’t see for this year a difference regarding last year. Strength in our operating expenses regarding contingencies is at the same level of last year. What we have been following is the following. After this period of next deliveries, generally you have a subsequent period where you have neighbor problems etcetera. Of course, what you see is a reduction of these, when we are longer delivering late units, but there is a planning, there is a window in these of, let’s say factors. You have justice issues to deal with etcetera. So I think this thing to continue very much with last year, although it’s a very difficult level to estimate. You have to know what is – the pace of decision, but that is very much with last year.

So do you see another bit next year an improvement. So when we get inclusive terms, the periods when the neighbor is resolved and this climate takes to go through the justice. So there is this match, which has been worked on, and it will be one or two year before it actually begins to diminish.

As far as the spin-off, the administrative part is ongoing. This weekend, we carried out the first separation, first wave so to speak, between Gafisa and Tenda, although physically in the same states. We have the teams divided, split up. And we will continue the admin separation throughout the year. We have several phases to go through and each one encompasses different areas of the company that we are now doing. And in parallel, we’ll continue with that mapping out of the alternatives and the impacts of each one of the alternatives.

What is a good capital structure, liquidity, or the contractual issues which we have to deal with, so that we can keep things down and know what the best alternatives for the ownership structure is. And also with market question from the admin point of view, we just things roll on, and by the end of the year we would have both of the admin areas split up, and this would generate revenue.

And the other, we are also mapping out, so we’ll keep an eye on the markets, but I repeat we have the desire to carry out this separation. We are working hard to know what the best capability is now at this moment, because of market reasons. We don’t yet have any definite timing. We have said that throughout 2015, we hope we will do this, if we have a good solution. For the time being, we have not yet changed anything vis-à-vis the market.

Nicole Hirakawa – Credit Suisse

Thank you.

Operator

Our next question comes from Rafael Pinho from Morgan Stanley.

Rafael Pinho – Morgan Stanley

I’d like you to continue elaborating about Tenda’s separation. So it becomes very clear the weight of Tenda and the result of the company of being negative and until you are talking and continuing to talk about continuing the separation process. My question is, well, based on what you know, you are talking about discussing the best alternative area by area. So do you have some of the parts, which is going to do much of that today? And based on with the question is, does it make sense the focus of management – are there structure that has to improve possibility before it can walk on term to next [ph]?

Andre Bergstein

Good morning, Rafael. So looking your question down, it has two sides to it. The first side is this question has to do with G&A. At the end of the year, we gave out the guidance. So we continue relative to targets where we have replenished the Gafisa this year which achieved 7.5% of G&A at the launch. So this refers to the launch. Yes, and we continue to believe and working to which the relationship that G&A. And also during the last – next year, 2015 with the São Paulo launches.

So what we have seen with those preparations, obviously there is more and less. On the one hand, it can increase on front lines, and the other it will decrease. So we assume as we have done in the admin structure, we are very comfortable of the statement, but we will continue to be strong seeking these indicators which were mentioned, and we do not see the risk – obviously we have the risk of the [indiscernible] and what we’re going to launch, we have the guidance we look here, but we continue to believe that this separation will gain an efficiency and not affect the G&A.

And we’re working for those. It’s not a question of say, let’s separate and see what happens. We’ll separate and let’s work to achieve these metrics. This is very important to rationalize it to [indiscernible] and contribute to profitability. Therefore, there is a whole dynamics when we separate the Tenda, we doesn’t increase headcount. We kept the same headcount. What we did was to apply different responsibilities. So if we had someone who is responsible for accounts payable in the three companies, Alphaville, Gafisa and Tenda, you take the staff, [indiscernible] which you’re applying more responsibility for other areas, so that she could have more opportunities to these people and so they can perform broader roles.

So this was the dynamics that we have been working with, Rafael. So we continue with those objectives.

And your second question regarding Tenda. So for us, it’s become clearer – it’s not clearer just by chance. We want to bring more and more visibility to you of how two companies are working independently. So as it become clearer to us that Gafisa has a very healthy gross margin and the Tenda separating it, regarding new revenue and then – of the new projects and the legacy projects, it’s clear to us that as the legacy decreases, the Tenda margins would trend towards the margin – gross margin of 28%, 30% or around that.

So the idea of separating the two was to bring greater visibility, and we are comfortable here, as this year we still deliver and also the inventories, they will certainly come over that 2015. But things are rolling well, and I think this makes convincing that we are on the right track.

Rafael Pinho – Morgan Stanley

Now what about the planning? Very often you said the Tenda profitability to the negative. Could you get – really whether the legacy could be – is just condition, could the separating the two is that a necessary condition before letting out the legacy?

Andre Bergstein

I don’t think the separation is necessary for better profitability. No, I think it’s important just to have two structures, both of them focused on their markets, as if we have to gain here with this and the recognition for [indiscernible]. So we have to get – let the dissolved projects, and concentrate and focus on the new projects in getting scaled. That’s what we want to do.

Also it’s very important at this moment that Tenda, as we’re curious with no launches and you will see that at this moment, the revenue vis-à-vis last year especially at this moment is in traction. We are decreasing revenues of our projects and we’re getting new ones, so it’s necessary being a reduction of volume. So when you increase scale with a good margins, you would change your profitability.

And the question of timing. We have already announced that adds too much, it brings [indiscernible] and finding the solution for the potential separation during 2015, we understand that this timing is good. As this year, we drive up the legacy and 98% in Paulo and Rio and [indiscernible] legacy behind, next year focus on the new model.

So things talk together as clearer and closer contender focused on the new model and at the same time you have a company which estimates so that it can be strong enough to be separated and move on.

Operator

Our next question comes from Luíz Maurício from Bradesco. You may proceed.

Luíz Maurício – Bradesco

Good morning. A question regarding that table of forecast. Before, let’s talk about contingency, that you really answered in the question, your impairments was R$110 million in the fourth quarter to R$156 [ph] reversal with earnings. So in the flow, was in full of land [ph] the sale was lower than margin sale, would you confirm that please? And also understand this reversal of the forecast of impairments of R$110 million to R$156 million. What was that? And the second question, Alphaville. Are you – what about operating expenses, fee and financial expenses. Could you give details on that?

Andre Bergstein

Hello Maurício. With second question, well, we have a lot of new provision on Alphaville. In the first quarter, we had adjustments of – 12 adjustments of expenses which also had to with all the adjustments to cutting values [ph] and on deposits. So where are those adjustments in the present value? It’s the portfolio and the interest rates for what has happened there. There has been an increase of [indiscernible] which offset the adjustment to present value. The average cost of that also and this inclusive the portfolio of ACV [ph] and contributed to the loss of Alphaville in the first quarter of the year.

Regarding impairment, I would check. I will check and I’ll get back to you on that.

Luíz Maurício – Bradesco

Thank you.

Operator

(Operator Instructions) Eduardo Silveira from Banco Espírito Santo has the next question.

Eduardo Silveira – Banco Espírito Santo

Good morning. I have a question regarding gross margin. When we do a quarterly analysis and we have the fourth quarter ‘14, we’ll see a plus of R$150 million and a plus [ph] in the delivery of legacy of something to do with Tenda.

Andre Bergstein

Hello Eduardo. Well, in the two large quarters, the first quarter and fourth quarter of 2013, there were some non-recurring effects. In the first, the margin was increased. In the fourth quarter, we had a reversal of additional costs, both in Tenda and Gafisa about R$34 million – about R$35 million in Tenda and R$9 million in Gafisa, which were provisioned for works that are currently concluded.

So we had clearly reported [ph] a positive impact on the margins. So we already expected a reduction of the gross margin of the adjusted gross margins in the first quarter of the year. We had an effect in Tenda, because of this volume of terminations also that contributed to push the margin down. So basically this was the effects of some non-recurring effects in the last two quarters. And the Tenda termination volumes which pushed the margin a little bit down. This is why the gross margin and the adjusted gross margins were a little bit down.

Eduardo Silveira – Banco Espírito Santo

Thank you.

Operator

(Operator Instructions) As there are no more questions, we would like to ask our speakers to move to their final remarks.

Andre Bergstein

So I would like to thank you very much for your attention listening to the call, answering your questions. If you have any more questions, please get in touch with us. Have a good morning, and thank you so much.

Operator

The conference call is now closed. Thank you for your participation and have a good day.

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