U.S. Markets close in 2 hrs 54 mins

Edited Transcript of GFSA3.SA earnings conference call or presentation 16-Aug-19 2:00pm GMT

Q2 2019 Gafisa SA Earnings Call

Sao Paulo Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Gafisa SA earnings conference call or presentation Friday, August 16, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Roberto Luz Portella

Gafisa S.A. - CEO, CFO, IR Officer & Director

================================================================================

Conference Call Participants

================================================================================

* Luis Guilherme Braga Stacchini

Crédit Suisse AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to Gafisa's Second Quarter 2019 Results Conference Call. Today with us, we have Roberto Portella, Gafisa's CEO, CFO and IRO and member of the Board of Directors.

We would like to inform you that this conference call is being recorded. (Operator Instructions)

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

Please, Mr. Portella, you may now begin.

--------------------------------------------------------------------------------

Roberto Luz Portella, Gafisa S.A. - CEO, CFO, IR Officer & Director [2]

--------------------------------------------------------------------------------

Ladies and gentlemen, I am pleased to talk to you today to communicate Gafisa's operating and financial results for the second quarter of 2019.

In line with all that had been announced, the company has not ventured into new investments in new launches despite the quality of its landbank and the perspectives it may represent for the near future. Our focus was on monetizing assets, restoring our consumer confidence and reestablishing the deliveries scheduled before resuming the launch-in cycle. This effort includes the full resumption of these various works on our sites, which currently have a delivery schedule that is absolutely consistent with our plans and also with their reorganized budgets and the costs related to such works.

Net presales totaled BRL 56 million in 2Q '19, 13% higher quarter-on-quarter. It should also be noted that the 2016 launches such as like Boa Vista and Choice Santo Amaro were the highlights in our results. Units under construction reached 62% of the sales volume. It should also be noted that cancellations kept falling. This downward trend is expected to drop even more by the end of the year due to the management's measures that we are taking to prevent cancellations. And if they start increasing, to address the issue in the most appropriate intelligent way possible, in line with the quality of service we provide to our customers. There was a 23.4% reduction quarter-on-quarter and a higher PSV in 2Q '19 than in the previous period.

In the next slide, we will take a look at the projects that we delivered in 2Q '19. Choice Santo Amaro was our main highlight with a PSV in Gafisa's share of BRL 91.317 million. It has 227 units. They were all delivered, with 88% of them being completely sold. It should also be noted that our construction quality, the level of quality of Gafisa's constructions are above the market average, which boosts customers' preference for Gafisa's construction quality standards.

On the next slide, we will discuss the company's gross profit and margin in the period in 2Q '19. Our revenue was virtually BRL 100 million compared to the BRL 95 million in 1Q '19. Gross profit was BRL 36.9 million, almost BRL 37 million, which was also significantly higher than the first quarter of 2019. As a result, our net revenue was BRL 99 million in the quarter, 4.4% higher quarter-on-quarter. And that is thanks to a higher sales volume. Adjusted gross margin was 49% versus 18.6% in the first quarter. It also means that we were able to sell units with higher profit margins.

In the next slide, we can see details about our expenses and profits in 2Q '19. As you can see in the chart, selling, general and administrative expenses had a significant reduction, 71% year-on-year. This is the result of the resizing and also structural changes to the way that the company is run. These reductions were significant without prejudice to the quality and good operating results and also profitability of Gafisa's businesses.

Another highlight was the greater control of expenses. The net loss was therefore lower than in the previous periods. Net loss decreased to BRL 12.7 million. That is a reduction of 49% in comparison with the BRL 25 million losses in 2Q '18. So optimizing our structure and adapting that structure to our current production capacity has achieved great results, and this has been perceived -- it has been noticed by the market as one of the greatest advances of our current management.

On the next slide, we'll discuss our debt and cash. Here we also have good news. The debt has fallen, it totaled BRL 770 million, a 20% reduction year-on-year. Our focus remains on reducing debt.

Today, we have some operations that were completed under the new administration, and from the debt standpoint, there was a reduction in our debt in comparison with cash availability. Cash was reinforced by the injection of BRL 182 million. That amount BRL 182 million, out of that amount BRL 132 million came from the first tranche of capital increase that was successfully conducted by the company, in which over 1,700 investors invested funds through their preemptive rights and also 300 new investors acquired preemptive rights, purchasing all of the leftover stock that was made available through this capital increase.

Net cash generation in the period, in 2Q '19, was BRL 6.9 million, which shows a visible growth trend in own cash generation. The use of cash through progressive and gradual expenditure control management has proved sufficient for the maintenance of the company's operations, which is one of the main objectives of the current administration.

Now let's talk a little bit about the actions that have been already implemented or they are currently in progress. As you all know, the first major change that was put in place in the first 120 days of the first -- the new administration was to put together a new team of executives with extensive real estate experience and also to make our management more horizontal to integrate our teams and departments and to manage through creative new mindsets and innovative spirit. In our governance, we also have new members in the Board of Directors who collaborate in the development of policies for the company, aiming, obviously, at the short and medium terms, but especially the long term, which has been one of our main focuses. And we have been doing that through a long-term strategic approach designed by the help of Bain & Company as well as through recreating our management by means of careful diagnosis and guidance on our current management practices provided by the consulting company Falconi.

Now from an operational point of view, the most dramatic change in comparison with the previous administration was the full resumption of our works and construction sites, which now have redefined budgets and schedules and which will be delivered on the dates that have been or that will still be announced to the market. Another remarkable highlight is the review in the sales department and marketing investments as well. We are investing heavily on tools to encourage the use of online sales and also to boost our sales team, which has already shown great performance in the past, for a higher sales results that -- since there has been a slight decline in the recent past.

So we will improve our sales capacity through these innovations and new investments that we have been making. We are also taking measures to generate liquidity from traditional deposits. We are also seeking other sources to update our receivables and to collect our receivables too so that our own cash has significance increases by the end of this year.

The completion of the first capital increase, as I mentioned before, in the amount of BRL 132 million was a major step forward in 2Q '19. And also, the beginning of the renegotiation of our financial operating liabilities with dramatic revision of the company's fixed and variable expenses.

Now what can we announce as the next major steps for our very near future? First, as announced in a special meeting that was held a few months ago, we will have a second tranche of capital increase of up to the authorized capital limit. And with that, we will have a new capital increase of up to BRL 273 million. This does not exclude the possibility to raise BRL 150 million in debt through convertibles and mandatory convertible securities, both in the local market and also internationally.

These actions consolidated the idea that we need a strong Gafisa, a company with solid cash so that we are able to resume investments and regain our prominent place in the market, since Gafisa has had such a rich history over the past 6 years -- 60 years.

As announced before, I believe it is important to mention our efforts to relist the company on the New York Stock Exchange, which is a remarkable effort. The relisting should happen in a very short time, which will also spark foreign capital's interest in having our assets listed on the New York Stock Exchange.

With that, ladies and gentlemen, we conclude our presentation, and I would like to tell you that we are right now conducting the process, the campaign to sell our finished units. And those units, those properties today account for a PSV of around BRL 437 million. The relaunch will be conducted together with the launch of our website, which will feature several devices that will allow online sales to happen in more significant volumes than the ones that the company has had in the past.

So these steps are innovative steps, and they will greatly contribute to the continued success of this administration and the adoption of new technologies but also in the pursuit of significant short- medium- and long-term results. Thank you very much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Mr. Luis with Crédit Suisse.

--------------------------------------------------------------------------------

Luis Guilherme Braga Stacchini, Crédit Suisse AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Roberto, I have two questions. The first one is more related to your strategies. I would like to understand exactly what your main focus is or what will your focus be after the second capital increase tranche? Where are you going to work harder on focus? Are you going to be focused on finished units or restructuring your debts or resuming launches, so I'd like to know exactly where have you been spending your time more in your work in the company?

And the second question, understanding that there is a firm guarantee that the second capital increase will happen, what's the size that Gafisa will be able to reach on a stable level?

--------------------------------------------------------------------------------

Roberto Luz Portella, Gafisa S.A. - CEO, CFO, IR Officer & Director [3]

--------------------------------------------------------------------------------

Luis, thank you for the question -- the great questions. The first one is related to our focus, am I correct? The focus of our strategic plan and the focus of our current management. Well, first of all, we are pursuing a more dynamic way to manage our main goals. One of them was cancellations. We made progress in that field. We are putting together in our administrative structure -- despite the different numbers of departments that we have, we are putting together teams with people from a number of different fields looking for immediate results in the reduction of the problems that we have in some segments, receivables are another area, sales as well, the development of our website, communication and so on and so forth.

On the financial side, we have a better structure than the one that we had earlier in our management with new executives, strong executives who are taking over the financial department. And with that, we have been able to decentralize the investments that are currently still in our holding, they are on hold, and we want to place those funds to other companies, for which we are putting together the CRIs operations. So that's our main focus today. But more importantly, it's not about our current results, it's more about the future. It's about the future of the real estate markets and our efforts. At least that by hiring Falconi and Bain & Company, we were able to make great efforts and great progress. Recently, we had a discussion with Bain & Company, we had a meeting with about 10 people from our company and also people from Bain, and we discussed business platforms that can be developed in the future -- not in near future but maybe after next year.

Now when it comes to launches, we have been very cautious. But instead of talking about launches -- and I believe that we're going to be some surprises soon because we have at least 2 projects that are ongoing right now and those projects will be launched later this year or earlier next year, and those points are very important in terms of PSV. And also in terms of our production with the 8 products that we have in the market right now. We are also resuming our discussions with Alphaville, with the exchange of our 30% positions for assets in Alphaville, which means that we are going to see some activities there, too. I believe that, that gives you an idea of our main focuses for the future.

The real estate market will have different platforms, very different from the ones that we have now. Landbank may represent an activity in itself and not only just an expense but also a source of revenue. Now the constructions' area is also showing a trend towards resuming the constructions such as it happens with other companies with partnerships.

And also when it comes to sales, that's the area where we have been investing the most with digital technologies but also pursuing different products that are related to construction. For example, house up. That is an area that is servicing our customers right now, providing layout, decor, furniture of the units that we sell to the customers. And that for us today has a margin of around 50%. I hope I answered the first part of your question. And I will now answer the second one, which is the size of the company after the second tranche of the capital increase.

The capital increase will have about BRL 49 million in new stock at a price of BRL 5.58 with the subscription bonus and BRL 5.42 for any shareholder that wishes to liquidate the leftovers after the exercise of preemptive rights. So that represents an increase that can go from BRL 265 million to BRL 273 million if there is the full subscription. Adding that to the BRL 132 million that we really added, it means that we are going to have the capacity to face all of the challenges that we captured through the strategic plan that we developed with Bain, with the new developments that I just announced for this year. So we are going to have a more solid and stronger company, a company that has cash is a healthy company that can look at the future and say, we're not just going to survive, we're going to fight for the best positions in the market and generate value to our investors. I believe that with that, I answered your second question.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) With that, we conclude the question-and-answer session. I will now like to turn the floor over to Mr. Portella for his final remarks. Please, Mr. Portella, you may now begin.

--------------------------------------------------------------------------------

Roberto Luz Portella, Gafisa S.A. - CEO, CFO, IR Officer & Director [5]

--------------------------------------------------------------------------------

Well, I believe that the second quarter of 2019 shows the new line of conduct of the new management. I believe it was well perceived by the market. We have our own pace of restructuring and organizing the company, and that has been extremely consistent and careful, with great efforts being made by the new team and the existing team and both teams were extremely successful.

In the communication department, we have been investing heavily, with Carla been in charge of communication. She is right here with me right now, and she is at your full disposal in case you have other questions or any other needs. If you need more information, please contact her and also myself.

I am fully dedicated to meeting any of your demands when it comes to the new management of the company and also our future goals in our market, in our management. So thank you all very much for your participation, and I hope I will be able to bring some more good news to you and to our investors. Thank you very much.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

This concludes Gafisa's conference call. Thank you very much for your participation, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]