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GAFISA RELEASES 1Q14 RESULTS

FOR IMMEDIATE RELEASE

São Paulo, May 09, 2014

Gafisa S.A. (Bovespa: GFSA3; NYSE: GFA), one of the leading Brazilian homebuilder, today reported financial results for the quarter ended March 31, 2014.

MANAGEMENT COMMENTS AND HIGHLIGHTS

We started 2014 motivated by the results achieved in the prior year and confident in the goals and guidelines contained in our business plan for the upcoming year.

Traditionally, the first quarter is characterized by seasonally lower activity. In the Gafisa segment, although aware of the changes in the country’s macroeconomic scenario, we are happy with the operational and financial results we achieved in the period. Launch volumes reached R$353.9 million in 1Q14 and included 2 projects in São Paulo and 1 in Rio de Janeiro. Pre-sales reached R$187.6 million in the quarter, with inventories representing 80% of the total, and launches the remaining 20%. It should also be noted that Gafisa segment dissolutions were down 58% y-o-y, despite the high volume of deliveries in recent quarters. This reduction of dissolutions in the Gafisa segment demonstrates the improved credit profile in our customer base.

As for the Tenda segment, the 1Q14 marks another step forward in the application of the new business model initiated in 2013. Given the strong performance of projects launched last year, first quarter launches totaled R$181.4 million and were spread over 4 projects in São Paulo, Rio de Janeiro, Bahia and Pernambuco. Pre-sales reached R$51.8 million and were impacted by a higher volume of dissolutions. This is the result of the delivery of almost 5 thousand units in the last 6 months.

Since late 2013, reduced operational complexity coupled with the narrowing of the Company’s geographic footprint, led to higher profitability. The consolidated gross margin, before interest, increased to 30.5% in 1Q14, as compared to 22.0% in same quarter of last year.

Cash generation was a highlight in the quarter. The Company recorded cash generation of R$107.3 million in 1Q14, reaching free cash flow of R$20.5 million.

Reasserting our commitment to enhancing shareholder value, at the end of April the Company approved the payment of supplementary dividends totaling R$32.9 million, which, when added to interest on own capital paid in February, represents a dividend yield of 11.0%, based on 2013.

We continue to implement our five-year business plan for the 2014 to 2018 period, in which guidelines for the development of our business for the coming years were established. The plan details the expected size of Gafisa and Tenda’s operations, appropriate leverage, profitability guidelines, and importantly, our commitment to capital discipline and shareholder value generation, which are reflected in the guidance released to the market at the end of 2013.

On February 2014, we announced that the Board is studying the potential separation of the Gafisa and Tenda business units into two independent, public companies. We are analyzing possible impacts and scenarios for the proposed separation to identify what are the best ways for its implementation. In these first three months of the year, we have made progress in the administrative separation process of the Gafisa and Tenda business units, already dividing some areas between both companies, and we expect that most of this process to be completed by the end of the year, at which point the two companies will operate independently from an administrative point of view. As part of this process, Duilio Calciolari, after 14 years of meaningful dedication to Gafisa, announced in February the intention to leave his position, and after a transition period, Sandro Gamba was appointed CEO last Monday, and Rodrigo Osmo remains in charge of Tenda business. The Company will keep the market informed as new definitions may occur over the coming months.

Gafisa entered 2014 well positioned to benefit from all the initiatives implemented in the last two years. Reduced operational complexity, a more appropriate cost and expense structure, the new Tenda operating model and Gafisa’s narrowed geographic footprint, coupled with financial flexibility achieved by the sale of a stake in Alphaville, were important steps in preparing the Company to face future challenges. These initiatives should also lead to improved results in 2014.

FINANCIAL RESULTS

▲       Net revenue recognized by the “PoC” method was R$326.7 million in the Gafisa segment and R$105.9 million in the Tenda segment. This resulted in consolidated revenue of R$423.7 million in the first quarter, a reduction of 14.7% compared with the previous year.

▲       Adjusted gross profit for 1Q14 was R$132.1 million, up from R$111.7 million in 1Q13. Adjusted gross margin rose to 30.5% versus 22.0% in the prior-year period. The Gafisa contributed with R$116.5 million, and margin of 35.7%, while the Tenda segment’s adjusted gross profit was R$15.6 million, with a margin of 14.7% in 1Q14.

▲       Adjusted EBITDA was R$26.5 million in the 1Q14. The Gafisa segment reported adjusted EBITDA of R$54.8 million, while the Tenda segment’s adjusted EBITDA was negative at R$24.9 million. Note that the consolidated adjusted EBITDA includes the effect of the AUSA equity, while Gafisa segment adjusted EBITDA is net of this effect.

▲       The Company reported a net loss of R$39.8 million in the first quarter.

▲       Operating cash generation reached R$107.3 million in the 1Q14, resulting in positive free cash flow of R$20.5 million. The Gafisa segment recorded R$99.1 million in operating cash generation, while the Tenda segment reached R$8.2 million.

OPERATING RESULTS

▲       Launches totaled R$535.4 million in the 1Q14, compared to R$196.7 million in the 1Q13. The Gafisa segment launched R$353.9 million across 3 projects, while the Tenda segment launched 4 projects with a total PSV of R$181.4 million.

▲       Consolidated  pre-sales totaled R$239.3 million in the 1Q14, compared to R$107.9 million in the 1Q13. In the 1Q14, sales reached R$187.5 million in the Gafisa segment and R$51.8 million in the Tenda segment. Consolidated sales from launches represented 24% of the total, while sales from inventory comprised the remaining 76%.

▲       Consolidated sales over supply (SoS) reached 7.5% in the 1Q14 and 3.9% in the 1Q13. In the Gafisa segment, SoS was 7.9%, while in the Tenda segment it was 6.4%.

▲       Consolidated  inventory at market value increased R$233.0 million on a sequential basis, reaching R$2.9 billion. Gafisa’s inventory reached R$2.2 billion and Tenda’s inventory totaled R$752.3 million.

▲       Throughout the 1Q14, the Company delivered 8 projects, totaling 1,796 units. The Gafisa segment delivered 524 units, while the Tenda segment delivered the remaining 1,272 units.

ANALYSIS OF RESULTS

Gafisa segment

Gross Margin Expansion and Reduction in Selling Expenses

During the past year, the Gafisa segment’s margins improved due to the delivery of legacy projects and the narrowing of the brand’s geographic footprint. Accordingly, the segment’s profitability increased. Adjusted gross profit totaled R$132.1 million in 1Q14, with margin of 35.7%, compared to 29.9% in 1Q13.

Results were also positively impacted by a 44.8% y-o-y reduction in the level of selling expenses, despite higher launch volumes.

Net Income

The first quarter net loss was R$2.3 million, compared to a loss of R$11.6 million in the year-ago period. Excluding the equity from Alphaville, negative at R$3.4 million, Gafisa segment net income in the 1Q14 was positive at R$1.1 million.

Below is a brief description of the main factors impacting results.

Tenda segment 

Gross Margin Expansion and Lower Expenses

The reduced contribution and complexity of Tenda legacy projects, coupled with the resumption of launches under a new business model, is resulting in a gradual improvement in the segment’s margins. At the end of 1Q13, adjusted gross profit was at R$1.9 million, while in the 1Q14, it reached R$15.6 million, with adjusted gross margin reaching 14.7%, compared to a margin of 1.3% in the 1Q13.

A streamlined cost structure also contributed to the segment’s first quarter results. Selling, general and administrative expenses decreased from a year earlier to R$12.7 million, with a sharp 43.3% reduction in selling expenses. This was mainly driven by the in-store sale process, which is one of the pillars of the new Tenda business model.

Net Income

The first quarter net loss was R$37.5 million, compared to a net loss of R$43.9 million in the 1Q13.

RECENT EVENTS

Following the completion of the sale of the Alphaville stake and the inflow of the transaction proceeds, in a meeting held on December 20, 2013, the Company’s Board of Directors approved the payment of interest on equity to shareholders in the amount of R$130,192,095.57, representing R$0.31112217224 per share. The payment was effective February 12, 2014.

Additionally, on April 25, 2014, at the Annual General Meeting, the payment of R$32,919,915.46 in supplementary dividends to the Company’s shareholders was approved, representing R$0.082486835998 per share, excluding treasury shares. The effective date for payment is still being evaluated by the Company and will be announced to the market as soon as defined.

For fiscal year 2013, the Company approved the payment of dividends totaling R$163,111,939.28 million (gross amount), or approximately R$0.37 per share, representing a dividend yield of 11.0% for the year.

Regarding the share buyback program in place, on April 30, 2014, the company had already acquired 23 million shares, around 71% of the total amount permitted, considering the maximum amount of 32,938,554 shares.

The approved program is conditional on the maintenance of consolidated net debt at a level equal to or less than 60% of net equity and does not obligate the Company to acquire any particular amount of shares in the market. The program may be suspended at any time.

On February 28, 2014, the Company canceled an open share buyback program in place in the Tenda subsidiary and opened a new program in Gafisa, containing the same previously defined conditions, which can repurchase the remaining balance of shares.

On April 25, 2014, the Company’s Annual General Meeting was held, and we highlight the following resolutions:

i)              Reduction of the Board of Directors from 9 to 7 members, with the election of the following members for a term of 02 years: Odair Garcia Senra, Cláudio José de Carvalho Andrade, Guilherme Affonso Ferreira, José Écio Pereira da Costa Júnior, Maurício Marcellini Pereira, Rodolpho Amboss and Francisco Vidal Luna;

ii)             Approval of the allocation of net income for the fiscal year 2013, and subsequent payment of approximately R$32.9 million as supplementary dividends, as mentioned above;

iii)            Establishment of up to R$13.4 million in total compensation to be paid to the Company’s management for the fiscal year 2014, approximately 19% less than the amount paid in 2013;

Note: Financial operational unaudited information

1) Adjusted by capitalized interests

2) Adjusted by expenses with stock option plans (non-cash), minority. Ebitda from Gafisa segment does not consider the equity of AUSA, for all quarters, and does not include AUSA stake sale operation results in 4Q13.

3) Backlog results net of PIS/COFINS taxes – 3.65%; and excluding the impact of PVA (Present Value Adjustment) method according to Law nº 11,638

Key Numbers for Tenda

Table 2 - Operating and Financial Highlights – (R$000, and % Gafisa, unless otherwise specified)

Note: Financial operational unaudited information

1) Adjusted by capitalized interests

2) Adjusted by expenses with stock option plans (non-cash), minority. Consolidated Ebitda includes the AUSA equity effect, for all quarters, but does not consider the AUSA stake sale operation results in 4Q13.

3) Backlog results net of PIS/COFINS taxes – 3.65%; and excluding the impact of PVA (Present Value Adjustment) method according to Law nº 11,638. 

During 1Q14, the Company made initial progress in separating some of Gafisa and Tenda’s administrative functions, initiating the corporate areas effective division process. By the end of the year, most of Gafisa and Tenda administrative structures will be segregated, operating independently.

At this moment, we highlight the following points:

(1) Definition of segregated corporate structures for Gafisa and Tenda;

(2) Assessment, understanding, sizing and necessary adjustments in processes and systems for separation of areas;

(3) Definition of the separation strategy, workforce, separation schedule for different areas, and major milestones on the process.

In parallel, the Company continues the studies related to separation alternatives of the two companies, assessing issues relating to capital structure, liquidity, and fiscal, tax, legal, corporate aspects, among others.

As previously announced to the market, with the completion of the turnaround process and in line with the intention of separating Gafisa and Tenda business units, Duilio Calciolari announced to leave the company, after 14 years of dedication to Gafisa. Therefore, on May 05, Sandro Gamba was named the new CEO of the Company. Until then, Sandro Gamba, was the CEO of Gafisa business unit, having held a number of leadership positions, in several areas of Gafisa business cycle, for more than 15 years dedicated to the Company.

Andre Bergstein remains as Chief Financial Officer and Rodrigo Osmo as CEO for Tenda.

The Company will keep its shareholders and the market informed about the process and any developments pertaining to the potential separation.

First quarter launches totaled R$353.9 million, represented by 3 projects/phases located in the cities of São Paulo and Rio de Janeiro. In the 1Q13, the segment registered R$83 million in launches.

The Gafisa segment’s 1Q14 gross pre-sales totaled R$267.9 million. Taking into account a 58% y-o-y decline in the volume of dissolutions, 1Q14 net pre-sales increased 85% y-o-y to R$187.5 million. Inventory accounted for 80% of sales, while the sale of units launched during the quarter represented the remaining 20%. The segment accounted for 66% of consolidated launches.

Table 4. Gafisa – Launches and Pre-sales (R$000)

The Company has shown a consistent reduction in their level of dissolutions. Gafisa segment dissolutions declined 58.1% y-o-y, in keeping with a decline in the level of dissolutions to a more stable level.

Of the 148 Gafisa segment units cancelled and returned to inventory, 39% were resold in the period.

In 1Q14, Gafisa maintained its focus on inventory reduction initiatives. Accordingly, inventory represented 80% of total sales in the first quarter. The market value of Gafisa segment inventory reached R$2.2 billion in the 1Q14, as compared to R$2.1 billion in the previous quarter. Finished units outside of core markets accounted for R$256.9 million, or 12% of total inventory.

Table 6. Gafisa – Inventory at Market Value (R$000)

During the same period, finished units comprised R$309.8 million, or 14% of total inventory. Of this amount, inventory from projects launched outside core markets totaled R$196.7 million. We emphasize that the Company has seen evolution in the sales velocity in these markets over the past few quarters, and we believe that by the end of 2015 we should be able to monetize such inventory in the so called non-core markets.

Gafisa segment landbank, with a PSV of approximately R$6.4 billion, is comprised of 34 different projects/phases located exclusively  in core markets. Amounting to nearly 11.4 thousand units, 78% are located in São Paulo and 22% in Rio de Janeiro. The largest portion of swapped land in Rio de Janeiro, ends up impacting the total land acquired through swaps, which now reaches 59.7%.

Table 8. Gafisa - Landbank 1Q14

Table 9. Gafisa - Changes in the Landbank 1Q14

In the 1Q14, the Company expanded its landbank by an additional PSV of R$231.2 million, representing an acquisition cost of R$49.9 million. Of this total, 87.3% was acquired with cash, and 12.7% through swap agreements. In reference to the land acquired in the quarter, about R$ 8.8 million has already been paid in 1Q14, and approximately another R$34.4 million are to be disbursed by the end of the year.

First quarter adjustments reflect updates related to project scope, expected launch date and inflationary adjustments to landbank during the period.

During the 1Q14, Gafisa Vendas – an independent sales unit of the Company, with operations in Sao Paulo and Rio de Janeiro, - accounted for 52.8% of gross sales. Gafisa Vendas currently has a team of 485 highly trained, dedicated consultants, combined with an online sales force.

During 1Q14, Gafisa delivered 4 projects/phases and 524 units.

Table 10. Gafisa Segment - Delivered Projects

Note: 1– PSV refers to potential sales value of the units transferred to financial institutions. 2– PSV refers to potential sales value of delivered units.

Table 11. Gafisa - Pre-Sales and Recognized Revenues, by Launch Year (R$000)

Gross profit for the Gafisa segment in 1Q14 was R$88.9 million, compared to R$87.8 million in 1Q13. Gross margin for the quarter was 27.2%, up 3.3 percentage points over the previous year. Gafisa’s margins have improved, in keeping with the delivery of legacy projects and the narrowing of the segment’s geographic footprint. Excluding financial impacts, the adjusted gross margin reached 35.7%.

It is noteworthy that in the last two quarters of 2013, gross margin was positively impacted due to the reversal of provisions in some Gafisa developments, and also due to positive INCC variation.

Find below more details about the composition of Gafisa’s gross margin in 1Q14.

Table 12. Gafisa – Gross Margin (R$000) 

Table 13. Gafisa – Gross Margin Composition (R$000) 

SG&A expenses totaled R$51.4 million in the 1Q14, a 21% decrease when compared with the R$64.8 million reported in 1Q13. This decrease primarily reflects a lower volume of selling expenses that despite a higher volume of launches, has presented a reduction of R$15.4 million, 44.8% lower than the previous year, result of better balance in marketing expenses and sales commission.

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Adjusted EBITDA for the Gafisa segment totaled R$54.8 million in the 1Q14, up 14.3%, as compared to R$45.0 million in the previous year. Note that adjusted EBITDA does not consider the impact of Alphaville equity. The adjusted EBITDA margin, using the same criteria, was 16.8%, compared with a margin of 12.2% in the year-ago period.

In the 1Q14, despite a modest decrease in net revenues, the Company's operating performance benefited from the following factors: (i) a 5.8 percentage point expansion in adjusted gross margin compared to the 1Q13; and (ii) a R$13.4 million, or 20.6%, y-o-y reduction in SG&A.

Table 15. Gafisa - Adjusted EBITDA (R$000)

EBITDA adjusted by expenses associated with stock option plans, as this is an entry, non-cash expense.

*In 4Q13, besides the effect of the AUSA equity, the operation result was discounted, EBITDA reflects equity interests in each period: 30% in 1Q14; 100% in 4Q13 and 80% in the 1Q13.

The backlog of results to be recognized under the PoC method was R$526.3 million in the 1Q14. The consolidated margin for the quarter was 36.8%, an increase of 150 bps compared to the result posted in 4Q13 and 210 bps over 1Q13. The table below shows the backlog margin:

Table 16. Gafisa - Results to be recognized (REF) by company (R$000)

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During 1Q14, gross sales reached R$244.9 million, while net pre-sales totaled R$51.8 million. Sales from inventory accounted for 61% of the total, while sales from units launched during 1Q14 accounted for the remaining 39%.

All new projects under the Tenda brand are being developed in phases, in which all pre-sales are contingent on the ability to pass mortgages onto financial institutions. During 1Q14, 1,278 units, representing R$147.6 million in net pre-sales, were transferred to financial institutions.

Table 17. Tenda – Launches and Pre-sales (R$000)

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The volume of 1Q14 dissolutions was down 58.6% versus the 4Q11, when the restructuring process began, and was 16.9% lower on a y-o-y basis.

As expected, due to the high volume of deliveries in recent quarters, the level of cancellations in the Tenda segment increased compared to the 4Q13, particularly among older programs and those in the Minha Casa, Minha Vida program. Changes to bank credit criteria over the second half of 2013, which impacted the ability of some customers to secure financing, also impacted the level of cancellations for that period. Approximately 80% of 1Q14 dissolutions in the Tenda segment were related to old projects.

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Tenda remains focused on the completion and delivery of legacy projects, and is dissolving contracts with ineligible clients, so as to sell the units to qualified customers.

Of the 1,223 Tenda units cancelled and returned to inventory, 47% were resold to qualified customers during the same period. In 1Q14, 55% of dissolutions related to the new Tenda model were resold in the same period. It is important to note the importance of the sale and transfer process contained in the New Tenda Business Model, in which within 90 days the customer will either sign the financing agreement with the financial institution, or will have his/her contract cancelled.

In the 1Q14, Tenda transferred 1,278 units to financial institutions, representing R$147.6 million.

Table 19. Tenda - PSV Transferred - Tenda (R$000)

Note: 1– PSV refers to potential sales value of the units transferred to financial institutions.

During 1Q14, Tenda delivered 4 projects/phases and 1,272 units.

Tenda has achieved satisfactory results in its inventory reduction initiatives, with inventory representing 61% of total sales. The market value for Tenda inventory was R$752.3 million at the end of the first quarter, compared to R$618.4 million at the end of 2013. The inventory related to the remaining units for the Tenda segment totaled R$495.0 million or 65.8% of the total. During the period, inventory comprising units within the Minha Casa, Minha Vida program totaled R$491.9 million, or 65.4% of total inventory, while units outside the program totaled R$260.3 million in the 1Q14.

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Note: 1) BoP beginning of period – 3Q13. 2) EoP end of period – 4Q13.  3) % Change 4Q13 versus 3Q13. 4) 4Q13 sales speed. 5) projects canceled during the period.

Table 21. Tenda - Inventory at Market Value – Construction Status (R$000)

Note: Inventory at market value includes projects with partners. The figure is not comparable to the accounting inventory due to the new accounting consolidation implemented on behalf of CPCs 18, 19 and 36.

Tenda segment landbank, with a PSV of approximately R$3.0 billion, is comprised of 24 different projects/phases located exclusively in core markets. 28.1% are located in São Paulo, 15.9% in Rio de Janeiro, 13.3% in Minas Gerais and 42.7% in the Northeast region, specifically in the states of Bahia and Pernambuco. Altogether these amount to more than 17.7 thousand units.

Table 22. Landbank - Tenda Segment

Table 23. Tenda – Changes in the Landbank

In the 1Q14, the Company expanded its landbank with an additional potential PSV of R$485.9 million, representing an acquisition cost of R$32.5 million. Out of this total, 91.9% was acquired for cash, and 8.1% by swap. In reference to the land acquired in the quarter, about R$3.5 million has already been paid in 1Q14, and approximately  R$13.4 million are to be disbursed by the end of 2014.

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Tenda remains focused on the completion and delivery of its remaining projects, and is also dissolving contracts with non-eligible clients, so as to sell the units to qualified customers.

The run-off of legacy projects is on schedule and shall be mostly concluded in 2014, with approximately 95% of the remaining units being delivered by the end of the year

Financial Result

Tenda’s net revenue in 1Q14 totaled R$105.9 million, a reduction of 24% compared with the previous year. The decline reflects the resumption of Tenda launches in the 1Q13 following a period during which launch activity was halted while a new business model was developed. As shown in the table below, revenues from new projects accounted for 55.0% of Tenda’s revenues in 1Q14, while revenues from older projects accounted for the remaining 45.0%.

Table 25. Tenda - Pre-Sales and Recognized Revenues (R$000)

Gross profit in 1Q14 was R$8.5 million, an increase of 188% compared to a loss of R$9.6 million in 1Q13. Gross margin for the quarter reached 8.0%, an increase of 14.8 percentage points from the prior-year period. The improvement in gross margin reflects the delivery of Tenda legacy projects. At the same time, the contribution of projects developed under Tenda’s new business model, which contain higher margins, is increasing, as observed in recent quarters.

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During 1Q14, selling, general and administrative expenses totaled R$30.8 million, a decrease of 29.1% compared to R$43.4 million in 1Q13. The decline reflects the Company's efforts to adapt its cost and expense structure to the size of its operations.

Selling expenses totaled R$11.8 million in the 1Q14, a decrease of 43.3% compared to 1Q13, due to the following: (i) consolidation over time of the sales transaction through the store, started with the New Model in early 2013; (ii) adjustments to the Tenda’s sales team compensation and commissioning policy, reflecting the new business model; (iii) smaller representation of the legacy projects impacting Tenda’s cost structure.

Table 27. Tenda – SG&A Expenses (R$000)

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The backlog of results to be recognized under the PoC method was R$67.5 million in 1Q14. The consolidated margin for the quarter was 31.8%, an increase of 800 basis points compared to the 1Q13.

Table 29. Results to be recognized (REF) (R$000)

Note: Revenues to be recognized are net of PIS/Cofins (3.65%); excludes the PVA (Present Value Adjustment) method introduced by Law nº 11,638

The amounts include projects still under suspension clause.

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Notes: ST – Short term | LT- Long term | PoC – Percentage of Completion Method

Receivables from developments: accounts receivable not yet recognized according to PoC and BRGAAP

Receivables from PoC: accounts receivable already recognized according to PoC and BRGAAP

Operational cash generation performed well in the first quarter. The Company ended 1Q14 with operating cash flow of R$107.3 million, reflecting: (i) the transfer/receiving process for units sold with financing agents (R$418.6 million was transferred during the period), and; (ii) greater control over the Company’s business cycle. Gafisa had operational cash generation of R$99,1 million, while Tenda reached R$8.2 million.

Free cash generation for the period was positive, ending the 1Q14 with R$20.5 million, excluding the following effects: (i) R$55.2 million disbursed in the share buyback program for the period; (ii) R$63.6 million for tax payment from AUSA sale operation, considering any tax credits and; (iii) payment of interest on own capital in the amount of R$130.2 million.

Table 32. Cash Generation

At the end of March, 2014, the Company’s Net Debt/Equity ratio reached 44.9%, compared to leverage of 36.1% in the previous quarter and 94.0% in the 1Q13.

Excluding project finance, the Net Debt/Equity ratio showed a negative ratio of 18.9%.

The Company's consolidated gross debt reached R$2.9 billion at the end of 1Q14, compared to R$3.2 billion at the end of 2013. As previously announced, the Company intends to use part the proceeds of the Alphaville transaction to reduce its gross debt. In the 1Q14, the Company amortized R$435.5 million in debt, of which R$217.4 million in project debt and the remaining R$218.2 million in corporate debt, which equates to around 29% of total maturities by the end of 2014.

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