Gafisa S.A. (OTCPK:GFASY) Q3 2022 Earnings Conference Call November 16, 2022 ET
Company Participants
Flavio Prieto – IR Manager
Conference Call Participants
Flavio Prieto
Hello. Good afternoon, everybody, and welcome to the Third Quarter of 2022 Earnings Conference Call. My name is Flavio Prieto, I’m the Head of Investor Relations, and I will be conducting the presentation, and I will be available at the end to take questions.
Before we begin, I would like to inform you that this conference is being recorded. [Operator Instructions] Also it is important to highlight that the management’s statements involve risks, uncertainties and may refer to future events. Any changes in macroeconomic policies or laws and other operating results may affect the company’s performance.
Now we can begin the presentation. Thank you. Let’s go to the next slide where we are going to show you the highlights. In the third quarter we launched a development Sense in the City of Niterói in the neighborhood of Icaraí in the State of Rio de Janeiro.
And we also had the pre-launch of Cidade Jockey in São Paulo adding up to R$544 million in PSV and 204 have been launched, and the rest are in the pre-launch phase. We have been using these terms, and pre-launches means when we don’t have the permits, all the permits. And in October, we obtained it, and we already have the stand in place and the sales force in place and all the marketing actions.
In 2022, we have already launched R$1.07 billion. And that is essential for us to keep the same, the appropriate level where we are right now. And looking forward, you can see that we are finishing the works that we had in our portfolio. And year-to-date, we developed and delivered 266 units, and we delivered Belvedere Osasco with 266 units, with a PSV of R$610 million.
Also we have obtained a performance that was very impressive with R$184.5 million, taking us close to R$1 billion in sales over the last 12 months. We also reached R$184.5 million in net sales with a 9% decrease quarter-on-quarter, an increase of 143% year-on-year.
When it comes to the gross income, we reached R$41 million in the third quarter of 2022. We had some significant impact, for example, the PoC method and also the swaps, but the result is in line with the second quarter of 2022. But the results were lower year-on-year by 38%. Now the gross margin dropped a little bit to 11.7% in the third quarter in comparison with 16.4% in the second quarter, a drop of 473 points.
And in this quarter we had some significant events, the main one being the acquisition of Bait. We acquired 100% of the Rio de Janeiro developer and it has been fully integrated within Gafisa. We already had an office in the City of Rio de Janeiro. We revamped the office, and we have about 80 people working for us in Rio de Janeiro, which is appropriate considering that Rio de Janeiro is the second largest market for us in the country. And on the picture, you can see the premium locations of Bait’s developments, in the most desired neighborhoods of Rio de Janeiro.
We had about R$180 million in this transaction. Half of that amount is being invested in cash and the other half is going to be paid in asset swaps. And here you can see some of the assets that were acquired. And you can see that Gafisa brought about R$500 million in free cash flow for the next two or three years. We can see in our balance sheet about R$215 million through the PoC method. You can see that, that is appropriated in our balance sheet, and the rest will be recognized over the course of the next quarters.
So you can see the high quality of these assets, fully in line with Gafisa’s inventory. Some of the developments include Canto in the neighborhood of Copacabana/Ipanema. It is located between those two neighborhoods. It has full views to the sea, to the ocean. And let’s take a look at the numbers. We are talking about R$928 million in swaps PSV. We have already launched 530 and our land bank amounts to R$600 million. And these are developments that are really no-brainers in the City of Rio de Janeiro.
Now let’s talk about the operating results. As we said on other occasions, we launched R$730 million in the first nine months of 2022 with two launches in Rio de Janeiro, Stratos in the neighborhood of Botafogo, Sense in the neighborhood of Icaraí. We also have Stratos in Itaim in São Paulo and Evolve Vila Mariana in the City of São Paulo. We launched all of these developments.
And our PSV excluding swaps is R$633 million. And we should remember that they are all in line with the strategy of having a presence in the high middle income and high income segments.
On the next slide, you can see that we have already launched over R$1 billion in launches and pre-launches. As of today the pre-launches have already become launches. We launched the development two weeks ago, and it was very successful. We had over 128 portfolios. We are now confirming the sales information, and it was a great success. This is a very differentiated development.
We are working with Gensler [ph], one of the biggest architecture firms in the world to help us develop this product, and we are very confident in it. It is incredible and the commercial response has been great. So year-to-date, we have launched over R$1 billion, and the net results for Gafisa is about R$1 billion, also R$986 million, which is important for us to keep the inventory level at the appropriate level so that we can perform well in our sales and also bring profit to the company.
At the same time, as we launch new products, we strengthened our operating commitment with the developments that were already in our portfolio. And you can see that we have already delivered 1,064 units with a PSV equivalent to R$610 million. These awards have been completed with the occupational permits having been issued, which is very important for managing purposes.
So it is important for us to reaffirm our commitment with the future of the company and also with the consumers who trusted Gafisa and bought our units. Belvedere, for example, was a great success in sales, and I’m sure that the consumers will enjoy it very much once they move in.
Now let’s talk about the net sales. We should remember that we are exceeding already R$930 million in accumulated sales. These are gross sales. It is a very significant result, reflecting the size of the company, the size that the company has today. From a growth standpoint, in this quarter year-on-year you can see that we have grown by 143%. We had an unusual event in 3Q ’21 with a high cancellation level in the Parque Maia development with R$70 million in impact. But it has been sold almost entirely. So although the comparison — the impact was great, the comparison is not really fair.
But I think that now we should pay attention to the sales year-to-date. I think it’s interesting to look at the year-to-date results, the first nine months of the year with a growth of 62%. It shows that we are at a good level where it really matters. And for us, what matters the most is to sell great products to consumers. We have been making efforts towards that goal and the quality of the products can be seen in the success of sales.
We had a specific workforce dedicated to some specific developments that have been delivered, and we needed to sell those units, and we did that over the course of the last quarter. And we can see that the middle-high and high income products sell better, and they already account for 90% of the company’s sales.
We have a very appropriate balance between delivered units, concluded units and units under development. We have 19% of finished units by the way.
Now let’s talk about our inventory. We reached R$2.1 billion because of the acquisition of Bait. We brought R$200 million from Bait in terms of inventory, and 86% of our inventory is in the middle-high, high income segments. And this chart is very interesting because it shows the company’s ramp-up over the course of the past quarters and our concern of putting the company at the appropriate level where it is right now in terms of sales. And that caused us to launch many units, and over the last 12 months, we can see already a reduction since we are keeping the company at an appropriate inventory level for the sales levels that we have right now and for the level of exposure that the company has from a financial standpoint.
Now let’s break down the inventory a little bit further. We have 86% of the inventory in medium high and high-end developments and 98% of the units are located in São Paulo and Rio de Janeiro, which are the two main areas, the most attractive areas for us, where we have professionals and workforces and appropriate resources. So as I said, we had a slight increase. Actually, it was a significant increase basically because of the inclusion of Bait’s inventory in our portfolio.
Now let’s talk about the financial results. In 3Q ’22 we had net revenues that were very interesting, very significant, maybe the highest net revenue since 2019 with R$351 million recognized in the quarter because of the developments that we launched and the progress of the construction works and also the sales speed.
So just to have an idea, if we compare this quarter with the previous one we had 111% growth because of this moment that the company is at right now. We had a significant ramp-up. We changed our product portfolio so that we could sell more and receive higher revenue levels, and at the end, improve our margins.
In 3Q ’22, 90% of the sales were in the high income segments and also the middle-high income segments. Out of the R$53 million in cancellations that we had, R$25 million were concentrated in two developments, and we have already resold those R$25 million. It was related to the timing of the development. So although cancellations went up a little bit in the quarter, we believe that this is not going to be recurring.
Now still about inventories, you can see the positive impact of bringing Bait’s inventory to our portfolio. Once we launched development, and here we are including only Sense — we are not including Jockey here — we went from 84% to 86% of the inventory in line with the current strategy.
Now let’s talk about revenues and results. We had a loss of R$49 million, and quarter-on-quarter we had a nominal increase in sales expenses. And in the last quarter, we had very low sales of about 3% of our revenues. And we also had an increase in COGS, but the main point was the recognition of swaps in two developments.
And in terms of gross margins, we had a very significant recognition of swaps in Sense and Canto developments. Now when it comes to net profit, because of those issues and also some non-recurring actions, we had an impact of R$19 million quarter-on-quarter with a net result of minus R$49 million.
Now when we look at our margins, we can see that our reference margin, between the receivables and the expenses, we are still above 35%, and that is last nine months view. And you can see that the adjusted gross margin decreased a little bit, below 30%, but it’s still at an appropriate level.
The margins this year suffered because of the financing costs that we have, and the net margin was about minus 9%. Of course, the backlog margin is an indicator of what we can expect for the next quarters. So we are focusing our attention on this, with some PoC recognitions in the beginning, which can cause some larger variations as happened this quarter. And we want to reach a backlog margin that is at the same level of the adjusted gross margin.
We had a significant increase or impact on our net debt. We had R$315 million in development debt this quarter in comparison with the last quarter because we recognized about R$240 million in receivables. The developments were very advanced in terms of sales. For example, Canto Rio and Canto Mar have already sold very well. And we believe that once these developments progress in their construction works, we are going to have higher recognitions.
And also, as we said in our earnings release, and we’re going to talk more about that later, we expect to decrease our net debt in the future.
Now moving on to the last slide in the presentation, and then we can start the Q&A session. I would like to talk about the action plan. And as we said, earlier, we are going through the 100-day plan internally. It is a plan in which we want to identify plenty of actions to be put in place. For example, we have already started our actions to decrease our G&A. We are reducing also the number of offices in the company, which can cause a reduction of R$400,000 per month.
We have also reviewed all of the developments in the company. In the 100-day plan, we are reviewing the details and financials of all developments, and we are also reviewing and working in a slightly different way, in a more optimized way, in our sales marketing strategies. We are going to review our processes and trying to cut off red tape and inefficiencies. We have also been working on a strategy for Gafisa Properties and we also want to review the capital structure of the company, which has a high leverage level, and we now need to review it.
Now let’s talk about the quick wins. I mentioned two already, and there’s another two here that should be mentioned. We need to take care of some legacy issues that are recurring at Gafisa. We have been working on them, but now we have one person dedicated to that specifically. And we are also redefining some non-strategic projects, for example, selling land bank or divesting in some development. There are about 10 projects that will undergo some changes so that we can optimize our operations over the next three months.
With that, we can start the Q&A session. Thank you.
Question-and-Answer Session
A – Flavio Prieto
Well, we have not hammered anything out yet. We have already mapped things out, and we know what we are going to move forward with, and what we are not, and we are trying to find the best way now for us to add the most value possible for shareholders.
Could you talk a little bit more about drop in margins in this quarter?
Well, the main point that was not in our radar was the recognition of swaps, which caused a big impact because of the PoC progress, and it was non-recurring. We also had increases in costs impacting our COGS. But I don’t think that has impacted our backlog margin. And in some projects, we are going to focus more on cash, and we are going to generate more cash in the company to the detriment of potential margin increases.
I think that I have already talked about the net debt. There was a question about it, but I think that I already gave some details about Bait’s net debt. I think that I have already addressed that question. And of course, you can take a look at the balance sheet to see more details.
To what do we owe the drop in gross margin, and to what do we owe the increase in cancellations in the last quarter and also the quarterly increase in sales expenses?
Well, when it comes to margins, I think that I already gave you details about that. We had R$53 million in cancellations and R$20 million are recurring. So considering the R$225 million in sales, about half of that was nonrecurring. The R$25 million were nonrecurring and we have been already able to revert that situation. And those cancellations wouldn’t have happened if we didn’t have that timing issue. It is reflected in a snapshot view from September. So that’s why we can see that level of cancellations.
And our sales expenses, I believe the expenses in the second quarter were very low. So that’s why the comparison is not so fair in 2Q, and it was only 2% to 3% of the revenues.
A question from Manuel now, how long should we wait to see Gafisa at the ideal level?
Well, I think that we have proved to be a very resilient company and a competitive one as well. We have a good sales volume. We have a very good productive change. So we have everything in place and organized here in terms of production. From an operating standpoint, the company is fully functional right now with a very interesting workforce. Of course, we want to improve the processes. We want to improve the levels and indicators for sure, but we are launching, selling, producing and delivering.
From a financial standpoint, we have a big challenge ahead of us. We’ve been around for 68 years, and our legacy is great. So we need to work hard now. And there are many actions under the new management, aiming at working as fast as possible. But from a financial standpoint, we are still working on our legacy. And over the coming quarters, we are going to bring you some tangible results for the shareholders.
Do you have any plans, Igor is asking do you have any plans about potential capital increases after the reverse stock split?
Well, we are in a silent period right now. We issued a material fact to answer B3’s [ph] question about the stock movement. And due to the regulations, we had to issue that material fact. But I can’t tell you anything right now about capital increases.
The reverse stock split is important because of potential liquidity issues and there are many things that are important here and that can serve a positive impact from the reverse stock split.
Gabriel Luchi [ph] is asking the 111% year-on-year is considering the inclusion of Bait in your balance sheet?
Yes. And that is a very good question. From a sales standpoint, since it is a KPI, we did not consider Bait’s sales in the quarter. So we have higher sales potentials in the coming quarters. When it comes to revenues, we recognized the month of September, the sales that occurred in the month of September. So you can see that we have great potential ahead of us.
I think that I have addressed all questions. Let me check once again. What would be the desirable leverage level?
Well, I can’t give you a number but we are working on decreasing our leverage level. Since the new management took over not a long time ago, we don’t have any signed contracts yet, but we have many initiatives and we want to negotiate, but we have not closed any negotiation yet. We know that the leverage is high and it should be clear to all of you that the company is focusing on decreasing our average level and to generate operational cash flow. That is our focus and target for the coming quarters.
Flavio Prieto
Well, I think that’s it. I think that I have addressed all questions. All right. So thank you all very much. And you can see our contact info. If you have any more questions, please don’t hesitate to contact us. See you next time. Bye-bye.
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