Gafisa SA (GFA) Q4 2018 Results Earnings Conference Call March 29, 2019 1:00 PM ET

Company Participants

Roberto Luz Portella – CEO, CFO, and Investor Relations Officer

Operator

Good afternoon and welcome to Gafisa’s Fourth Quarter and Full Year 2018 Results Conference Call. Today with us we have Roberto Portella, Member of Gafisa’s Board of Directors. We would like to inform you that this presentation is being recorded and that all participants will be placed on a listen-only mode during the presentation. Later, we will conduct a question-and-answer session. [Operator Instructions].

Before we begin, I would like to inform you that the management’s statements involve risks and uncertainties and will refer to future events. Any changes in macroeconomic policies or laws and other operating results may affect the company’s performance.

Please Mr. Portella, you may proceed.

Roberto Luz Portella

Good afternoon, ladies and gentlemen. I would like to start our presentation with details of this turnaround effort we made in the last quarter, which focused on structure and costs adjustments including the shutdown of a branch in Rio de Janeiro; the relocation of our headquarters; and revision of our processes.

Here we are looking at slide about the results of our turnaround. In 4Q ‘18 we reduced our headcount by nearly 50% accounting for savings of R$45 million per year. It is important to mention that over the restructuring process, another headcount reduction was made to back office areas and a technical team of the company was preserved. Marketing contracts were terminated saving R$40 million.

In the IT department, we hired a consulting company that reviews all of our processes and systems. We are expecting savings of R$18 million which will be factored over the next months as the contracts are reviewed, terminated and replaced. Moving to headquarters is more appropriate to company’s current situation, will provide us savings. And this relocation will provide us with savings of R$4 million.

Before we go to the next slide, it is important to mention that among all of the reductions in costs, we also reviewed and shutdown sales stand which generated savings of R$4 million. All actions we have taken and the ones we are going to take will lead to around a R$110 million in savings. Such restructuring efforts allowed the company to kick off 2019 in an adjusted and appropriate position for the new cycle in the real estate sector.

Now, let’s move on to the next slide. You see our 2018 launches. In 2018, we launched six projects which totaled R$728.6 million. In 4Q ‘18 we launched a project Scena Tatuapé with a total PSV of R$118.9 million. In 4Q ‘18 we expected to launch three other projects with a PSV of around R$320 million which were postponed to 2019.

One of the projects was located in an oversupplied region; the other two projects located in regions that did not reach an adequate development level, and therefore, did require adjustments. Because they wouldn’t be so profitable as we’d like.

On the next slide, we are going to see the sales and dissolutions. In 4Q ‘18 net pre-sales totaled R$95 million. The lower sales volume and the quarterly comparison was due to the adjustment that’s conducted by the new administration which had an immediate initial impact on the company’s SoS that generated healthier sales expectation and fewer dissolution.

The chart at the bottom shows our dissolution which came to R$58 million in 4Q ‘18, 39% lower year-on-year. And that happened despite a significantly higher volume of projects delivered in the yearly comparison. The average monthly dissolutions decreased from R$34.3 million in 2017 to R$19 million in 2018, which accounts for a significant reduction.

The next slide shows the breakdown of our inventory. The market value was R$1.225 billion in 4Q ‘18, down by 7.1% quarter-on-quarter. We would like to emphasize that out of R$461 million finished units, approximately 60% are residential units, which should contribute to sustaining the current level of inventory turnover and the monetization of these assets over the upcoming months. Additionally, we would like to mention that 73.5% of total inventory are residential units located in the state of São Paulo, where we are well-positioned to seize all opportunities that result from the economic upturn.

Let’s move on to the next slide, so that we can see our delivered projects. We delivered four projects in the City of São Paulo with total PSV of R$263 million, 5 times higher than the R$41 delivered in 4Q ‘17. In 2018, we delivered 12 projects with a total PSV of R$910 million.

Let’s move on to the next slide, here we can see our financial results. Net revenues totaled more than R$961 million in 2018, up by 22% year-on-year, a very significant increase. Such increase was driven higher sales volumes and work that made progress in the period.

Gross margin was impacted by provisions made in 4Q ‘18 totaling R$63 million, usually deriving from certain plots of land and inventory units. Excluding the effect of these adjustments, recurring adjusted gross margin in 2018 was 30.3%, 12 percentage points higher than the 18.3% in 2017.

The next slide shows a breakdown of our expenses. The savings delivered by the turnaround process can already be seen in our for 4Q ‘18 results. Selling expenses decreased by 45% quarter-on-quarter. And that happened due to a reduction in product marketing and selling expenses. General and administrative expenses went down by 48% quarter-on-quarter due to the reduction and termination of service agreements and payroll reductions as well.

Let’s move on to the next slide now to see our next topic. 2018 results were impacted by adjustments made in 4Q ‘18 such as the impairment of inventories, land, software and goodwill of the stake in Alphaville, not to mention provisions for contingency.

Excluding the impacts of these non-recurring adjustments that have been made, in 2018, the company’s recurring adjusted net loss would have been R$66 million, 65% lower than the R$190 million losses in 2017, which highlights the company’s turnaround.

It is worth mentioning as well that the company’s gross profit and the company in 2018 was twice as high as 2017 and it totaled R$91 million. Therefore, you can see that the company has been showing signs of progress when it comes to production and operation results.

Now, I’ll go to the next slide to take a look at our financial information, with net debt and cash generation. The company’s net debt reached R$752 million at the end of 2018 down by 21% year-on-year.

Over the year 2018 the company repaid approximately R$639 million of its debt. The consolidated net average cost was 11.44% per year. Cash generation in the quarter totaled R$14 million due to a greater control of expenses.

Now let’s take a look at some notes about what’s going on with the company and our new management. And the next steps that are we are going to take.

First of all, as you all know we have a new meeting to happen in the near future and we are going to discuss some topics, such as the process that we are going through with the help of very good companies and well renowned companies for management growth and new strategic plans and the long goal. In this process, we’re going to review our products. We’re going to review the core business of our company, the activities that are going to get our attention, and we are also going to identify sources of resources that can be useful and captured either by increasing capital or trying to find new funding instrument.

We have an approved increase in the authorized capital, which is extremely interesting, because it shows that in the new management — the new management is making efforts in terms of investment.

The shareholders wish to input capital in the company, which will result in the issuance of new shares and this is going to be announced when the time comes. Despite assessing the capitalization of the company, we are also going to analyze alternative funding tools, such as the issuance of certificates of real estate receivables, real estate funds and other types of launches, so that we are able to raise additional funds besides the equity funds that the company is for certain going to need.

I will take you now to how and when we are going to make use of these funding tools and when we are going to recover our financial capacity in the short, medium and long-term. Through the capital increase we estimate to have increased use of capital still this quarter.

Actually we — by this process I believe that we are going to have more capital coming in from new investors. And I believe that we are going to see interest from financial institutions in terms of supporting these projects and development and construction that company may intend to design and develop.

So this concludes the presentation for today and our financial results. And now we are going to start the question-and-answer session.

Question-and-Answer Session

Operator

Roberto Luz Portella

Good afternoon, everyone. It’s been a pleasure to be here with you, starting my new role here at Gafisa with the Market Relations and Institution Department.

I started as a Member of the Board of Directors two weeks ago. So I took over the CEO position with Eduardo Jacome which is now heading the Operational Department. I’m at your full disposal, if you have any questions and if I am able to answer those questions.

I would also like to mention that if I don’t have an immediate answer for your question, I am going to address them later on when the appropriate time comes. Thank you very much.

Operator

This concludes Gafisa conference call for today. Thank you very much for your participation and have a good day.

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2019-03-29