Gafisa Reports Results for First Quarter 2010

SAO PAULO, Brazil, May 4 /PRNewswire-FirstCall/ -- Gafisa S.A. (Bovespa: GFSA3; NYSE: GFA), Brazil's leading diversified national homebuilder, today reported financial results for the first quarter ended March 31, 2010.

Commenting on results, Wilson Amaral, CEO of Gafisa, said: "Positive momentum continued into the first quarter of 2010 with strong sales velocities across the company and a launch pace of R$ 703 million, more than triple the amount in Q109, despite the seasonally low period due to the summer holidays and Carnival. Sales for the quarter increased 53% to R$ 857 million as compared to Q1 2009, indicating that we are back to a strong growth trajectory after a period of uncertainty in the first half of last year. Top line growth and improving operating leverage contributed to the increase to R$ 168.5 of adjusted EBITDA, while adjusted EBITDA margin improved significantly from 14.1% to 18.6% as compared to the previous year's period.  With over R$ 2 billion in cash and cash equivalents and a lower leverage ratio of 34.6% as a result of our recent follow-on offering, we have reduced our financing cost structure and ensured our ability to fund our current plans for growth.  

Amaral added, "We have in place a platform to serve all segments of the large and growing Brazilian housing market and we will continue to benefit from our leading brands and strong reputation. Gafisa is leveraging the scale, operating efficiency and strong execution capacity to deliver high value products in line with demand trends across the country.  With the offering behind us, we will now turn our focus to increasing our land bank, accelerating the pace of our launches and opportunistically looking at synergistic acquisitions. We remain very optimistic about the prospects for our industry overall. This sentiment has been reinforced by the recently renewed support of the affordable housing segment by the Brazilian Government, where we are particularly well positioned to deliver high quality products to that market through our well-established Tenda brand."  

1Q10 - Operating & Financial Highlights

• Consolidated launches totaled R$ 703.2 million for the quarter, a 339% increase over 1Q09. Tenda launched R$ 297 million in the quarter, or 48% of the total amount launched in 2009.
• Pre-sales reached R$ 857.3 million for the quarter, a 53.5% increase as compared to first quarter 2009.
• Net operating revenues, recognized by the Percentage of Completion ("PoC") method, rose 67% to R$ 907.6 million from R$ 541.9 million in the 1Q09, reflecting a strong pace of execution.
• Adjusted EBITDA reached R$ 168.5 million with a 18.6% margin, a 120% increase when compared to Adjusted EBITDA of R$ 76.6 million reached in the 1Q09, mainly due to the strong performance in all segments.
• Net Income before minorities, stock option and non recurring expenses was R$ 79.6 million for the quarter (8.8% adjusted net margin), an increase of 40% compared with the R$ 57.1 million in the 1Q09.
• The Backlog of Revenues to be recognized under the PoC method reached R$ 2.93 billion, in line with the previous quarter. The Margin to be recognized improved 54 bps to 35.1%.
• Gafisa's consolidated land bank totaled R$15.6 billion in the 1Q10, with approximately R$ 520 million of new acquisitions, reflecting the internal policy of the Company to keep an average of 2 – 3 years of Land bank.
• On March 23, the Company concluded the public offering, raising R$ 1.02 billion(1).
• Gafisa's consolidated cash position exceeded R$ 2.1 billion at the end of March, supporting the Company's strategy to fund and execute its growth plan.

(1) Net proceeds from the public offering.

The first quarter financial statements were prepared and are being presented in accordance with the accounting practices adopted in Brazil (“Brazilian GAAP”), required for the years ended December 31, 2009. Therefore, they do not consider the early adoption of the technical pronouncements issued by CPC in 2009, approved by the Federal Accounting Council (“CFC”), required beginning on January 1, 2010. On November 10, 2009 the CVM, issued the deliberation no. 603 changed by deliberation no. 626, which gives the option for the listed Companies presents your 2010 quarterly information based o accounting practices in force at December 31, 2009.

CEO Commentary and Corporate Highlights for 1Q10

The first quarter of 2010 began and ended on a strong note for Gafisa.  Our consolidated platform of three leading brands, Gafisa, AlphaVille and Tenda, is reaping the benefits of scale, brand recognition, excellence in execution, product scope and geographic reach.  Our successful performance was recognized for the second year in a row through being named as "The Largest Construction Company in Brazil" by ITCnet. Macroeconomic trends and industry specific events indicate continuing strong prospects for us during the year ahead, and contributed to robust demand for our housing products across all segments.

During the quarter, the Government reaffirmed its commitment to the development of entry level housing through the "Minha Casa, Minha Vida" (MCMV) Program by announcing the extension of that program, a doubling of its initial committed resources to R$ 72 billion and a target of developing two million new homes over the next four years, signaling its continued support of the industry as a whole.  Tenda, Gafisa's business dedicated to that segment ramped up its launches of new developments, which more than doubled from the fourth quarter, to meet the growing demand.  Sales velocity of over 32% during the quarter also underscored the demand for Tenda's product, especially in light of the fact that most of our new developments were launched toward the end of the quarter given the holiday periods.  And finally, in late March, Gafisa completed a successful follow-on offering of more than R$ 1 billion that coupled with our existing cash and ample access to construction lines of credit will allow us to markedly expand our diversified portfolio of businesses and enhance our execution capacity as Brazil's largest construction company. An efficient operating platform that features three leading national brands that together serve all segments of the housing market, positions us to capture an important share of the projected 1.5 million new homes in annual demand growth.

A favorable environment for home sales continued throughout the first quarter despite the traditionally slower period due to summer holidays and Carnival, and we expect it will prevail through the year's end on the basis of strong fundamentals.  Despite signs of temporary increased inflationary pressure, real wages continue to grow, interest rates remain relatively low and unemployment rates continue to fall amid a backdrop of strong consumer confidence.  The growth rate in financing available to housing has remained robust despite historically high Selic rates, strengthening our view that this short term interest increase will not impact the sector.  In 2005, when the Selic was at 20%, financing grew at a rapid clip and, in 2008 when the Central Bank increased the Selic from 11.25% to 13.75%, there was no impact in the housing finance growth trend. This time, the market expects the Selic to reach 11.75% by the end of 2010 and then to drop back down again in 2011.  Additionally, mortgage rates are linked to the TR rate, which has a low historic correlation to Selic.  Finally, a combination of subsidies and financing derived from the FGTS, which is linked to the TR rate, serves to minimize the impact of general interest rate increases on mortgages tied to the entry level segment facilitated through the Caixa Economica Federal (Caixa).

On the inflationary front, while we are seeing increases in labor costs, up to now, the significant pent up demand allows room for price increases in all segments and our Gafisa product contracts allow us to adjust all balances and payments in line with inflationary changes.  The expanded use of aluminum mold technology as well as the reductions in construction cycle time for our Tenda product allow us to reduce our exposure to inflationary cost pressures as well, which we also believe will be a temporary concern, since the Central Bank is already taking the appropriate actions to control this pressure.

Brazil has enjoyed this positive macroeconomic climate thanks in part to a healthy financial system, which has seen both public and private lenders step forward to address the country's high housing deficit and low mortgage penetration.  Caixa, a financial institution central to these efforts, offers strong mortgage lending capacity as evidenced by its R$24 billion FGTS budget and has consistently improved its capacity to process mortgage applications and transfer contracted housing units to its books under the MCMV Program. Caixa's performance continues to benefit Tenda, where we saw the number of contracted units up to April 2010, equivalent of 5,108 units, to reach 84% of the entire number contracted during 2009.

Even without the benefit of the proceeds from the oversubscribed share offering, which were received in the final days of March, Gafisa maintained a strong pace of execution during the quarter, launching R$ 703.2 million, more than quadruple the amount of Q109.  The benefits of the net proceeds of R$1.02 billion generated by the offering are expected to be reaped in subsequent quarters, as our improved cash position of over R$2.1 billion will provide us with the financial flexibility to acquire land to support a substantial pipeline of projects, increase our launch activity to keep pace with mounting demand, and to opportunistically pursue strategic acquisitions to broaden our scope as we have done in the past.

Wilson Amaral, CEO -- Gafisa S.A.

Recent Developments

Follow-on Share Offering:

In March, Gafisa completed an oversubscribed follow-on offering, selling 85 million shares at R$12.50 and generating primary proceeds of R$ 1.06 billion and net proceeds of R$ 1.02 billion. Coupled with existing cash and ample access to construction lines of credit, the proceeds will allow the Company to markedly expand its diversified portfolio of businesses and enhance its execution capacity.  The proceeds, received by the Company on March 29, 2010, improved the Company's cash position to more than R$2.1 billion, and are expected to be used for land acquisition, to fund launch activity to keep pace with mounting demand, and to pursue strategic acquisitions.

Acquired Additional 20% of AlphaVille (Subsequent event):

On October 2, 2006, Gafisa executed an Investment Agreement governing Gafisa's admission in the capital stock of Alphaville Urbanismo S.A. (‚AUSA‛), which stipulated that an equity participation of 60% (First Stage) would be increased to 80% in 2010 (Second Stage) and to 100% after 2011 (Third Stage).  To increase Gafisa's equity participation in AUSA's to 80% per the Investment Agreement, Gafisa and Shertis Empreendimentos e Participacoes S.A.('Shertis‛), a wholly-owned subsidiary of Alphaville Participacoes S.A., acquired an additional 20% of capital stock (Second Stage) through a merger, by Gafisa, of all shares issued by Shertis. As a result of the merger of shares, Shertis will become a wholly-owned subsidiary of Gafisa. The merger of shares shall entail an increase in the equity of Gafisa in the amount of R$21,902,489.00, corresponding to the book equity value of the shares issued by Shertis merged into Gafisa, according to the appraisal report prepared by APSIS.

Increased Launches, Strong Sales Velocity at Tenda:

Tenda, Gafisa's business dedicated to the entry level and affordable market segment, continued to ramp up its launches of new developments in order to meet robust demand.  Tenda's first quarter launches more than doubled as compared to the previous quarter, with more than 60% of the quarter's launches coming outside of the traditional markets of Rio de Janeiro and Sao Paulo. Sales velocity of over 32% during the first quarter underscored strong demand for Tenda's product, especially given that most new developments were launched toward the end of the quarter, after the holiday periods.  

Higher Volume of Mortgage Transfers under Minha Casa, Minha Vida:

The consistently improving capacity of Caixa Economica Federal (Caixa) to process mortgage applications and transfer contracted housing units to its books under the MCMV Program, combined with more efficient internal processes at Tenda, continued to benefit Tenda's business during the beginning of the year, where the number of contracted units up to April reached 84% of the entire number contracted during 2009.

Minha Casa, Minha Vida 2:

While full details of the extension of the MCMV program have not yet been provided, the Brazilian government issued a general outline in March, in which it announced an extension of MCMV through 2014, and a total investment of R$72 billion, more than double the R$34 billion allocated to the initial program.  The goal of the second phase of the MCMV program is to deliver two million homes in four years encompassing an even lower income segment than previously targeted, but also expanded the current resources available to 40% of the total new amount to be destined to the 3-10x wages segments.  All of this activity underscores both the government's continued commitment to the financing of entry level housing and the significant, untapped demand within the affordable housing segments, demand that we expect will benefit Tenda, our business dedicated to that segment.

Tenda's Operational Improvement:

The first quarter of 2010 was the first full quarter that Tenda has been operated as a wholly-owned subsidiary of Gafisa.  As part of this transition, we integrated much of the back office operations, consolidated the reporting structure and took full strategic control of the direction and priorities of the business. The results of the work that was begun last year with Tenda and this past quarter are now bearing fruit. It delivered 24 completed projects/phases during the quarter and importantly, with the growth in revenue and operational and sales efficiencies achieved, contributed to the solid 18.6% Adjusted EBITDA margin for the company on a consolidated basis reflecting the combined favorable SG&A/Net Revenue. Additionally, with the number of mortgage contracted and transferred to Caixa up sequentially, Tenda is now well positioned to accelerate growth in a profitable fashion. We still have an important challenge related to 2010 Tenda's launches, but up to now we are on track with our strategic plan.

SOURCE Gafisa S.A.