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GAFISA RELEASES 2Q14 RESULTS

 

FOR IMMEDIATE RELEASE

São Paulo, August 08, 2014

Gafisa S.A. (Bovespa: GFSA3; NYSE: GFA), one of Brazil’s leading homebuilders, today reported financial results for the quarter ended June 30, 2014.

 

MANAGEMENT COMMENTS AND HIGHLIGHTS

We are pleased to report continued improvement in Gafisa and Tenda’s financial results during the second quarter of 2014. In spite of the uncertain economic environment and the impact, at the end of the quarter, of the World Cup in Brazil, the Company was able to report solid operating results, which positively impacted financial performance.

Gafisa’s profitability continues to improve. In the quarter, margins were in line with our expectations and are consistent with the business plan for the year. Adjusted gross margin reached 38.1%, and adjusted EBITDA margin was 20.9%, as a result of our strategy of consolidating operations in the more profitable markets of São Paulo and Rio de Janeiro. In response to the consumer spending environment in Brazil, we are taking a selective approach to product development and closely monitoring the execution process. In the second quarter we launched PSV of R$314.7 million in the Gafisa segment, comprising three projects in São Paulo and Osasco. Pre-sales during the period totaled R$ 251.3 million, reflecting the continued sale of inventory. The speed of sales improved on a sequential basis and was stable year-over-year. In the second quarter, the number of deliveries increased almost three-fold to 1,504 units, compared with 524 units in the 1Q14. The high level of deliveries underpinned the volume of transfers, which reached R$ 442.8 million in the first-half. While the sequential increase in quarterly unit deliveries led to an associated rise in cancellations, the result was lower on a year-over-year basis. The Gafisa segment generated net income of R$ 17.1 million in 2Q14, ending the 1H14 with accumulated income of R$ 14.8 million.

The Tenda segment also performed well. Net pre-sales totaled R$181.7 million, the best quarterly result since the fourth quarter of 2011, which marked the early stage of the turnaround process. The volume of sales cancelations declined 25.5% on a year-over-year basis, reflecting the immediate transfer of sales and the gradual reduction in legacy projects in the portfolio. While the segment’s performance improved in the quarter, sales were nonetheless impacted by the World Cup in Brazil, which reduced in store traffic. The performance of projects launched under the New Model was in line with expectations, due to good sales velocity, fast transfer to financial institutions and tight control over construction costs. In 2Q14, Tenda transferred 1,708 units, representing R$223.7 million in sales. This solid operating performance resulted in a significant improvement in financial results. Adjusted gross income reached R$69.4 million in the first-half, with a margin of 24.5%. The Company expects a sequential improvement in Tenda’s profitability, due to the ongoing streamlining of the segment’s cost and expense structure, the adherence to and strong performance of the New Business Model, and the contribution of a smaller number of underperforming legacy projects.

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Consolidated launch volumes for the quarter reached R$413.7 million and R$949.1 million in the first-half, while pre-sales were R$433.0 million and R$672.3 million respectively. Adjusted gross profit was R$205.2 million with a margin of 35.7% in the quarter, 7.5 percentage points above that of the previous year. The result underscores the improved operating and financial performance achieved by the two segments in 2Q14. During the first-half, adjusted gross profit was R$337.4 million, with a margin of 33.5%. Adjusted EBITDA was R$89.8 million in 2Q14 and R$116.3 million in 1H14, with an EBITDA margin of 15.6% and 11.5%, respectively.

The Company reported a loss of R$851.0 thousand in the second quarter, as a profit of R$17.1 million in the Gafisa segment was offset by a loss of R$18.0 million in the Tenda segment. In 1H14, the net loss was R$40.6 million.

We would also like to highlight the Company’s operating cash generation in the first half of the year. We ended 2Q14 with operating cash flow of R$39.1 million, totaling R$ 146.1 million in 1H14, as a result of: (i) the Company’s success in transferring units sold to financing agents, with nearly R$851 million transferred in the period; and (ii) greater control over the business cycle. Free cash flow generation in 2Q14 was negative at R$ 1.3 million, while in 1H14, free cash flow was positive at R$19.2 million.

The Net Debt/Equity ratio was 44.9% at the end of June and stable on a sequential basis. Excluding project finance, the Net Debt/Equity ratio was negative 16.9%.

During the second quarter we made further progress in separating the Gafisa and Tenda business units into two independent companies. During the quarter, a number of administrative functions, including Services, Personnel and People Management, among others, were split, and are currently operating independently from an administrative point of view. At the same time, we continue to evaluate the most appropriate capital structure for Gafisa and Tenda.

Looking ahead, we are confident in our business’s prospects, and believe that the measures implemented to date mean we are well-positioned to face future challenges.

 

 

Sandro Gamba Chief Executive Officer – Gafisa S.A.

Rodrigo Osmo Chief Executive Officer – Tenda

 

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FINANCIAL RESULTS

 

▲       Net revenue recognized by the “PoC” method was R$397.9 million in the Gafisa segment and R$176.9 million in the Tenda segment. This resulted in consolidated revenue of R$574.8 million in the second quarter, a reduction of 10.3% compared with the 2Q13, and an increase of 32.8% from the 1Q14. In the 1H14, net revenue reached R$1,007.5 million.

 

▲       Adjusted gross profit for 2Q14 was R$205.3 million, up from R$180.0 million in 2Q13 and R$132.1 million in the previous quarter. Adjusted gross margin rose to 35.7% versus 28.1% in the prior-year period and 30.5% in the 1Q14. Gafisa’s contribution was an adjusted gross profit of R$151.5 million, with an adjusted margin of 38.1%, while Tenda’s contribution was R$53.8 million, with a margin of 30.4% in 2Q14. In the first half, consolidated adjusted gross profit was R$337.4 million, and adjusted gross margin was 33.5%.

 

▲       Adjusted EBITDA was R$89.8 million in the 2Q14. The Gafisa segment reported adjusted EBITDA of R$83.4 million, while the Tenda segment’s adjusted EBITDA was negative at R$1.9 million. Please note that consolidated adjusted EBITDA includes Alphaville equity income, while the Gafisa segment’s adjusted EBITDA is net of this effect. At the end of 1H14, consolidated adjusted EBITDA reached R$116.3 million. Consolidated EBITDA margin reached 15.6% in 2Q14 and 11.5% in 1H14.

 

▲       The Company reported a consolidated net loss of R$851.0 thousand in the second quarter. Gafisa reported a profit of R$17.1 million, while Tenda reported a loss of R$18.0 million. In the 1H14, the net loss reached R$40.6 million.

 

▲       Operating cash generation reached R$39.1 million in the 2Q14 and R$146.1 million in the 1H14. In the 2Q14, the Company recorded cash burn of R$1.3 million, while in the first half, cash generation was R$19.2 million.

 

OPERATING RESULTS

 

▲       Launches totaled R$413.7 million in the 2Q14, compared to R$535.4 million in the 1Q14. In 1H14, R$949.1 million were launched. The Gafisa segment accounted for R$668.7 million across 6 projects, while the Tenda segment launched 6 projects with a total PSV of R$280.5 million.

 

▲       Consolidated pre-sales totaled R$433.0 million in the 2Q14, compared to R$386.8 million in the 2Q13. In the 1H14, sales reached R$672.4 million, with R$438.9 million in the Gafisa segment and R$233.5 million in the Tenda segment. Consolidated sales from launches in the period (1H14) represented 32% of the total, while sales from inventory comprised the remaining 68%.

 

▲       Consolidated sales over supply (SoS) reached 12.6% in 2Q14, compared to 7.5% in 1Q14. The result was stable on a year-over-year basis. In the Gafisa segment, SoS was 9.8%, while in the Tenda segment it was 20.8%.

 

▲       Consolidated inventory at market value increased R$61.9 million on a sequential basis, reaching R$3.0 billion. Gafisa’s inventory reached R$2.3 billion and Tenda’s inventory totaled R$691.4 million.

 

▲       Throughout the second quarter, the Company delivered 19 projects, totaling 3,689 units, representing R$678.2 million. The Gafisa segment delivered 1,504 units, while the Tenda segment delivered the remaining 2,185 units.

 

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ANALYSIS OF RESULTS

 

Gafisa Segment

 

The Gafisa segment’s margin has been improving in recent quarters, due to the consolidation of operations in certain markets and the delivery of legacy projects. In the 2Q14, adjusted gross profit increased to R$ 151.5 million, compared to R$ 116.5 million in the previous quarter and R$ 144.6 million in the 2Q13. Accordingly, the adjusted gross margin reached 38.1%, up from 35.7% in the 1Q14. Another highlight is the 14.0% y-o-y reduction in the amount of expenses, despite higher launch volumes in the period. These factors contributed to an increase in EBITDA margin to 20.9% from 16.8% in 1Q14 and 15.3% in the previous year.

 

Net income for the period was R$17.1 million, compared to a loss of R$2.3 million in 1Q14, and profit of R$11.9 million in the year-ago period. Excluding the equity from Alphaville, at R$8.4 million, the Gafisa segment’s net income was positive at R$8.7 million, compared with net income of R$ 1.1 million in 1Q14 and a net loss of R$ 30.6 million in the previous year.

Note that currently Gafisa holds a 30% stake in Alphaville, while in 2Q13 this stake was 80%.

 

Tenda Segment

 

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. In the 2Q14, adjusted gross profit increased to R$53.8 million, compared to R$15.6 million in the previous quarter and R$35.4 million in 2Q13. Accordingly, the adjusted gross margin reached 30.4%, compared to a margin of 14.7% in the 1Q14 and 13.3% in 2Q13.

A streamlined cost structure, which better reflects the size of operations, also contributed to the segment’s second quarter results. Selling, general and administrative expenses once again decreased from a year earlier, with a sharp 30.0% reduction in selling expenses, despite higher launch volumes in the period. This was mainly driven by the sale of units through Tenda’s own stores, which is one of the pillars of the new Tenda business model.

 

Second quarter net income was negative at R$18.0 million, compared to a net loss of R$37.5 million in 1Q14, and R$26.0 million in 2Q13.

 

 

RECENT EVENTS

 

Regarding the share buyback program in place, on July 25, 2014, the Company had acquired 24 million shares, or around 74% 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 oblige 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. The new program can repurchase the remaining balance of shares.

 

In keeping with the process to separate the Gafisa and Tenda business units, on July 29, 2014 the Company informed the market that the Brazilian Securities and Exchange Commission (CVM) authorized Tenda to change its securities issuer category to Category “A”.

Such conversion is part of the first phase of the process to separate the two segments, which was announced in February. Both Gafisa and Tenda are still working on studies related to separation alternatives and assessing issues relating to capital structure, liquidity, fiscal, tax, legal and corporate aspects, among others.

 

 

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Key Numbers for the Gafisa

Table 1 – Gafisa Segment - Operating and Financial Highlights – (R$000, and % Gafisa)

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 income from Alphaville.

3) Backlog results net of PIS/COFINS taxes – 3.65%, and excluding the impact of PVA (Present Value Adjustment) method according to Law 11,638.

 

 

 

 

Key Numbers for Tenda

Table 2 – Tenda Segment - Operating and Financial Highlights – (R$000, and % Tenda)

1) Adjusted by capitalized interests

2) Adjusted by expenses with stock option plans (non-cash), minority. Tenda does not hold equity in Alphaville.

3) Backlog results net of PIS/COFINS taxes – 3.65%, and excluding the impact of PVA (Present Value Adjustment) method according to Law 11,638.

 

 

 

 

 

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Key Consolidated Numbers

Table 3 - Operating and Financial Highlights – (R$000, and % Company)

1) Adjusted by capitalized interests

2) Adjusted by expenses with stock option plans (non-cash), minority. Consolidated EBITDA considers the equity income from Alphaville.

3) Backlog results net of PIS/COFINS taxes – 3.65%, and excluding the impact of PVA (Present Value Adjustment) method according to Law 11,638.

 

 

 

 

 

 

 

 

 

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Update on the Separation Process

 

Throughout this quarter, the Company continued to evaluate the potential separation of the Gafisa and Tenda business units.

As previously reported, a separation would be the next step in a comprehensive plan initiated by management to enhance value creation for both business units and its shareholders.

As announced in the first quarter, the Company made some initial progress in splitting Gafisa and Tenda’s administrative structures, so that they can operate independently in the future.

In this quarter, the Company made the following progress:

(1)   Effective separation of the following areas: Services, Personnel and Management Center, among others;

(2)   Physical separation of business units, with the aforementioned teams established at their respective head offices: Gafisa and Tenda;

(3)   Appointment of Felipe Cohen as the new Chief Financial and Investor Relations Officer of Tenda. The appointment marks an additional step in establishing the Tenda business as a standalone entity.

 

At the same time, the Company continues to evaluate separation alternatives for the two companies.

Among the initiatives and studies being undertaken, we highlight:

(1)   Review of relationship with agents potentially linked to the separation process in order to align  contractual and operational issues related to the possible separation.;

(2)   Amendment with the Brazilian Securities and Exchange Commission (CVM), related to the category of Tenda as an issuer. Since late July 2014, Tenda became registered under Category A.

(3)   Continuity of studies regarding the definition of a capital structure, which is appropriate to the business cycle of each company, as well as liquidity, and fiscal, tax, legal, corporate aspects, among others.

 

Over the coming months, the Company will continue the necessary studies for the separation of Gafisa and Tenda, and will keep its shareholders and the market informed as to the progress and developments of this process.

 

 

 

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GAFISA SEGMENT 

 

Operating Results

 

Second quarter launches totaled R$314.7 million, representing 3 projects/phases located in the cities of São Paulo and Osasco. In the 2Q13, the segment registered R$215.9 million in launches.

 

 

 

The Gafisa segment’s 2Q14 gross pre-sales totaled R$371.2 million. Taking into account a 12.9% y-o-y decline in the volume of dissolutions, 2Q14 net pre-sales increased 15.9% y-o-y to R$251.3 million. The sale of units launched during the quarter represented 38.3% of the total, reaching R$96.3 million. The segment accounted for 76% of consolidated launches.

 

 

 

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

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2Q14 sales velocity increased to 9.8% from 7.9% in 1Q14 and was in line with the previous year. Considering the last 12 months, Gafisa’s SoS ended the 2Q14 at 31.8%.

 

The Company has achieved a consistent reduction in the level of dissolutions. Gafisa segment dissolutions decreased 12.9% y-o-y, in keeping with a decline in the level of dissolutions to a more stable level.

 

 

Of the 255 Gafisa segment units cancelled and returned to inventory, 57.6% were resold in the same period.

In 2Q14, Gafisa maintained its focus on inventory reduction initiatives. Accordingly, inventory represented 62% of total sales in the period. The market value of Gafisa segment inventory reached R$2.3 billion in the 2Q14, as compared to R$2.2 billion in the previous quarter. Finished units outside of core markets accounted for R$220.9 million, or 9.5% of total inventory.

Table 5. Gafisa Segment – Inventory at Market Value (R$000)

 

During the same period, finished units comprised R$312.9 million, or 13.5% of total inventory. Of this amount, inventory from projects launched outside core markets represented R$180.3 million, as compared to R$196.7 million in 1Q14. The Company has seen an improvement in the sales velocity in these markets over the past few quarters, and believes that between the end of 2015 and beginning of 2016 it will have monetized a relevant portion of its inventory in non-core markets.

 

 

 

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1) Inventory at market value includes projects in partnership. This indicator is not comparable to the accounting inventory, due to the implementation of new accounting practices on behalf of CPCs 18, 19 and 36.

 

Gafisa segment landbank, with a PSV of approximately R$6.1 billion, is comprised of 32 different projects/ phases, amounting to nearly 10.8 thousand units, 77% located in São Paulo and 23% in Rio de Janeiro. The largest portion of land acquired through swap agreements is in Rio de Janeiro, thereby impacting the total amount of land acquired through swaps, which reached 59% in the second quarter.

 

Table 7. Gafisa Segment- Landbank (R$000)

 

Table 8. Gafisa Segment - Changes in the Landbank (R$000)

 

In 2Q14, the Company acquired new land with potential PSV of R$118.4 million at a cost of R$20.2 million, of which 46.5% was acquired with cash, and 53.5% through swap agreements. In regards to the land acquired in the quarter, about R$2.3 million was disbursed in 2Q14 and approximately another R$7.1 million will be disbursed by the end of the year.

 

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

 

During the 2Q14, Gafisa Vendas – the Company’s independent sales unit, with operations in São Paulo and Rio de Janeiro - accounted for 53.6% of gross sales. Gafisa Vendas currently has a team of 410 highly trained, dedicated consultants, combined with an online sales force.

 

During 2Q14, Gafisa delivered 8 projects/phases and 1,504 units.

 

 

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Table 9. Gafisa Segment - Delivered Projects

1) PSV refers to potential sales value of the units transferred to financial institutions.

2) PSV - Potential sales value of delivered units.

 

Financial Results

 

Net revenues for the Gafisa segment in 2Q14 totaled R$397.9 million, up 21.8% versus 1Q14 and 6.3% versus the prior year period.

 

In the 2Q14, approximately 97.6% of Gafisa Segment revenues were derived from projects in Rio de Janeiro and São Paulo, while 2.4% were derived from projects in non-core markets. The table below provides additional details.

 

Table 10. Gafisa Segment - Revenue Recognition (R$000)

 

Gross profit for the Gafisa segment in 2Q14 was R$119.1 million, compared to R$88.9 million in 1Q14, and R$124.1 million in the prior year period. Gross margin for the quarter was 29.9%, up 274 bps over the previous quarter. Gafisa’s margins and profitability have improved, in keeping with the delivery of legacy projects and the strategic geographic consolidation. At the same time, the increased contribution of newer, more profitable projects launched by the end of 2013 positively impacted results. Excluding financial impacts, the adjusted gross margin reached 38.1%.

 

The below table contains more details on the breakdown of Gafisa’s gross margin in 2Q14.

Table 11. Gafisa Segment– Gross Margin (R$000) 

 

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

 

SG&A expenses totaled R$59.8 million in the 2Q14, a 14.0% decrease y-o-y. Selling expenses decreased by R$11.1 million, or 27.9% y-o-y, despite the higher volume of launches, totaling R$28.4 million, reflecting lower marketing expenses and sales commissions. To note, due to the concentration of first quarter launches in the last weeks of the period, a large proportion of sales expenses were accounted for in the 2Q14 results.

 

The segment’s general and administrative expenses reached R$ 31.4 million, remaining stable compared with previous quarters.

Table 13. Gafisa Segment– SG&A Expenses (R$000) 

 

In the quarter, the Company recorded a R$ 13.9 million provision for the stock option program of its former subsidiary Alphaville, with exercise scheduled for 2014. To note, this is a one-off expense, which impacts cash only in the next quarter. As a result, the Other Operating Income/Expenses line totaled an expense of R$24.3 million, a 52.3% increase compared with 1Q14. Excluding the effect of the provision, this line was R$ 10.5 million, a 34.4% decrease compared to the previous quarter.

 

Adjusted EBITDA for the Gafisa segment totaled R$83.4 million in the 2Q14, up 45.5%, as compared to R$57.3 million in the previous year and above the R$54.8 million recorded in 1Q14. Adjusted EBITDA does not take into consideration the impact of Alphaville equity income. The adjusted EBITDA margin, using the same criteria, experienced a sharp increase, reaching 20.9%, compared with a margin of 15.3% in the year-ago period. In 1H14, the Gafisa segment’s adjusted EBITDA reached R$138.2 million, with a margin of 19.1%.

 

In 2Q14, Gafisa’s operating performance benefited from by a R$ 9.7 million, or 14.0%, y-o-y reduction in the level of selling, general and administrative expenses.

 

 

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Table 14. Gafisa Segment - Adjusted EBITDA (R$000)

1)        EBITDA is adjusted by expenses associated with stock option plans, as this is a non-cash expense.

2)        Gafisa segment EBITDA does not consider the impact of Alphaville equity income.

The backlog of results to be recognized under the PoC method was R$470.4 million in the 2Q14. The consolidated margin for the quarter was 36.2%, an increase of 134 bps compared to the result posted last year. The table below shows the backlog margin:

Table 15. Gafisa Segment - Results to be recognized (REF) (R$000)

 

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TENDA SEGMENT 

 

 

Operating Results

 

Second quarter launches totaled R$99.0 million and included 2 projects/phases in the states of Rio de Janeiro and Minas Gerais. The brand accounted for 24% of 2Q14 consolidated launches.

 

 

During 2Q14, gross sales reached R$299.3 million, while net pre-sales totaled R$181.7 million. Sales from inventory accounted for 94.4% of the total, while sales from units launched during 2Q14 accounted for the remaining 5.6%.

 

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.

 

 

Table 16. Tenda Segment – Launches and Pre-sales (R$000)

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In 2Q14, sales velocity (sales over supply) continued to improve, reaching 20.8%, which is in line with the same period last year. Considering the last 12 months, Tenda’s SoS ended the 2Q14 at 44.2%.

 

 

The level of dissolutions in the Tenda segment has decreased since the end of 2011, declining 25.5% to R$117.6 million in 2Q14 compared with 2Q13.

 

 

 

A high volume of recent deliveries, combined with changes to Caixa’s credit criteria in the last 2 quarters of 2013, impacted the ability of some customers to secure financing and resulted in an increase in first quarter 2014 cancellations. As expected, the impact of these factors has diminished and the level of cancellations in Tenda resumed its downward trend in this quarter. Approximately 80% of 2Q14 dissolutions in the Tenda segment related to old projects.

Table 17. Tenda Segment – Net Pre-sales by Market (R$000)

 

 

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In the 2Q14, Tenda transferred 1,708 units to financial institutions, representing R$223.7 million. In the 1H14, Tenda transferred 3,176 units, representing R$413.2 million.

 

Table 18. Tenda Segment - PSV Transferred - Tenda (R$000)

1)        PSV transferred refers to actual effective cash inflow of the units transferred to financial institutions.

 

During 2Q14, Tenda delivered 11 projects/phases and 2,185 units. Regarding Tenda’s legacy projects, there are around 4,400 remaining units to be delivered.

 

Tenda has achieved satisfactory results in its inventory reduction initiatives, with inventory representing 94.4% of total sales. The market value of Tenda inventory was R$691.4 million at the end of the second quarter, down 9.1% when compared to R$752.3 million at the end of 1Q14. Inventory related to the remaining units for the Tenda segment totaled R$421.6 million or 60.9% of the total, down 14.3% over 1Q14. During the period, inventory comprising units within the Minha Casa, Minha Vida program totaled R$487.9 million, or 70.6% of total inventory, while units outside the program totaled R$203.6 million in the 2Q14, down 21.8% q-o-q.

 

Table 19. Tenda Segment -  Inventory at Market Value (R$000) – by Region

 

Table 19. Tenda Segment - Inventory at Market Value  (R$000) – Construction Status

1) Inventory at market value includes projects in partnership. This indicator is not comparable to the accounting inventory, due to the implementation of new accounting practices on behalf of CPC’s 18, 19 and 36.

 

 

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Table 21. - Tenda Segment - Landbank (R$000) 

Table 22. Tenda Segment– Changes in the Landbank

In 2Q14, the Company acquired new land with potential PSV of R$27.1 million, representing an acquisition cost of R$2.9 million. This land was acquired in full through swap agreements.

 

During the first half of the year, Tenda launched projects under its New Business Model, which is based on three pillars: operational efficiency, risk management and capital discipline. Currently, the Company continues to operate in four regions: São Paulo, Rio de Janeiro, Minas Gerais and Northeast (Bahia and Pernambuco states), with a launched PSV of R$594.4 million to date. Below is a brief description of the performance of these projects:

Table 23. Tenda – New Model Monitoring

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

 

 

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Table 24. Tenda - Pre-Sales and Recognized Revenues (R$000)

 

 

Gross profit in 2Q14 reached R$45.8 million, a sharp increase compared to R$8.5 million in 1Q14, and R$19.7 million in the previous year. Gross margin for the quarter also increased significantly, reaching 25.9% compared to 8.0% in 1Q14 and 7.4% in the prior-year period. The improvement in gross margin is due to the following factors: (i) increased average margin of legacy projects in 2Q14, due to the resale, at higher prices, of previously canceled projects; (ii) increased participation of projects launched under the New Business Model, which have higher margins and profitability, as has been observed in recent quarters and more prominently in 2014.

Below is Tenda’s gross margin breakdown in 2Q14. To note, the gross margin of the first projects under Tenda’s new business model benefit from the use of landbank acquired in the past, resulting in increased profitability.

 

Table 25. Tenda – Gross Margin (R$000) 

 

During 2Q14, selling, general and administrative expenses totaled R$39.7 million, a 1.9% decrease compared to R$40.5 million in 2Q13.

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Adjusted EBITDA was negative R$1.9 million in 2Q14, compared to negative adjusted EBITDA of R$5.8 million last year and negative R$24.9 million in 1Q13.

Despite the lower level of revenue, the Company was able to improve its operating performance due to the expansion of its gross margin and efforts to streamline its cost and expense structure.

Table 27. Tenda - Adjusted EBITDA (R$000)

1) EBITDA is adjusted by expenses associated with stock option plans, as this is a non-cash expense.

2) Tenda does not hold equity interest in Alphaville.

 

The backlog of results to be recognized under the PoC method was R$61.6 million in 2Q14. The consolidated margin for the quarter was 29.6%.

Table 28. Results to be recognized (REF) (R$000)

 

 

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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 half. The Company ended 2Q14 with operating cash flow of R$39.1 million, reaching R$146.1 million in 1H14, reflecting: (i) the transfer/receiving process for units sold with financing agents (R$850.6 million was transferred during the period), and; (ii) greater control over the Company’s business cycle.

 

Free cash generation for the period was negative at R$1.3 million in 2Q14, including the effect of R$3.2 million disbursed in the share buyback program for the period. In 1H14, free cash generation was positive at R$19.2 million. The main non-recurring events that impacted free cash generation were: (i) R$58.5 million used in the share buyback program; (ii) the payment of R$63.6 million in taxes on the sale of Alphaville; and (iii) the payment of interest on own capital in the amount of R$130.2 million.

 

Table 30. Cash Generation

At the end of June, 2014, the Company’s Net Debt/Equity ratio reached 44.9%, in line with the previous quarter and lower than the ratio of 96.2% recorded in 2Q13.

 

Excluding project finance, the Net Debt/Equity ratio was negative 16.9%.

 

The Company's consolidated gross debt reached R$2.7 billion at the end of 2Q14, compared to R$2.9 billion at the end of 1Q14 and R$3.5 billion in 2Q13. As previously announced, the Company has been using part the proceeds of the Alphaville transaction to reduce its gross debt. In the 2Q14, the Company amortized R$483.8 million in debt, of which R$155.7 million was project finance and the remaining R$328.1 million was corporate debt. Considering the 1H14, the amount amortized was R$919.4 million in gross debt, with disbursements of R$236.2 million, allowing for a net amortization of R$683.2 million, or 53.9% of the R$1.3 billion debt maturing until the end of 2014.

 

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The Company ended the second quarter of 2014 with R$983.9 million of total debt due in the short term. It should be noted, however, that 58% of this volume relates to debt linked to the Company's projects.

 

Table 32 - Debt Maturity

 

 

 

 

 

 

 

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Financial Results

 

On a consolidated basis, net revenue in the 2Q14 totaled R$574.8 million, down 10.3% over the previous year.

 

In the 2Q14, the Gafisa segment represented 69.2% of revenues and Tenda accounted for the remaining 30.8%.

 

Gross profit in 2Q14 was R$164.9 million, an increase of 69.4% compared to the R$97.3 million reported in 1Q14, and R$143.8 million in the previous year. Gross margin for the quarter reached 28.7%, up 625 bps over the previous year. Adjusted gross profit reached R$205.3 million, with a margin of 35.7%. The gross margin is improving as Gafisa and Tenda segment legacy projects are replaced by projects launched in core markets and under the new Tenda business model, which contain higher margins and improved profitability. The increased contribution of more profitable projects to consolidated results can be observed in recent quarters.

 

Table 33. Gafisa Group – Gross Margin (R$000) 

 

SG&A expenses totaled R$99.5 million in the 2Q14, down 9.5% y-o-y. Compared to the 1Q14, the increase in this line is the result of the following factors: (i) selling expenses related to some projects launched late in the 1Q14; and increased sales volume in the period; and (ii) provision for a bonus in the Tenda segment in the 2Q14.

  

Table 34. Gafisa Group – SG&A Expenses  (R$000) 

 

 

With the turnaround process virtually complete, the Company is seeking to streamline its cost and expense structure and SG&A. For 2014, the Company is looking to improve productivity and increase the efficiency and assertiveness of its operations.

Adjusted EBITDA totaled R$89.8 million in the 2Q14, considering the Alphaville equity income impact. Consolidated adjusted EBITDA margin, using the same criteria, was 15.6%, compared with a 14.7% margin reported in the previous year and 6.1% reported in 1Q14. In 1H14, consolidated EBITDA was R$116.3 million, with a margin of 11.6%.

 

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Table 35. Gafisa Group - Consolidated Adjusted EBITDA (R$000)

(1) EBITDA adjusted by expenses associated with stock option plans, as this is a non-cash expense.

 

Depreciation and amortization in the 2Q14 reached R$16.0 million, an increase compared with the R$11.0 million recorded in the 2Q13.

 

The net financial result was negative R$3.1 million in the 2Q14, an improvement compared to a net financial result of negative R$33.7 million in 2Q13 and negative R$7.9 million in the previous quarter. Financial revenues totaled R$38.0 million, a 126.6% y-o-y increase due to higher cash balances and higher average interest rates in the period. Financial expenses reached R$41.0 million, compared to R$50.4 million in 2Q13, impacted by lower debt volume and also by higher interest rates in the period.

Income taxes, social contribution and deferred taxes for 2Q14 amounted to R$11.7 million.

Gafisa Group ended the 2Q14 with a net loss of R$0.8 million. Excluding the equity income of Alphaville, the Company’s net loss was R$8.4 million in the quarter, compared to a net loss of R$56.6 million recorded in 2Q13. In 1H14, net income was negative R$40.6 million.

Table 36 – Consolidated - Net Results - (R$000)

 

 

 

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The backlog of results to be recognized under the PoC method reached R$531.9 million in the 2Q14. The consolidated margin for the quarter was 35.3%.

 

Table 37. Gafisa Group - Results to be recognized (REF) (R$000)

 

 

 

 

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Alphaville sells R$ 303 million in the first semester of 2014

 

São Paulo, August 8th, 2014 – Alphaville Urbanismo SA releases its results for the 2nd quarter 2014 (2Q14 and 6M14), which are subjected to review by auditors.

            The company ended the 2nd quarter of 2014 with R$ 206 million in launches, a 3% decline when compared to 2Q13.

            During the first six months of 2014, launch volumes totaled R$ 309 million, 4% below the same period of last year.

 

                                                             

            The second quarter sales volume totaled R$ 183 million, 10% above sales in 2Q13.

            In the first semester of 2014, sales totaled R$ 303 million, representing an increase of 9% over the first semester of 2013.

 

 

 

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            During 2Q14, net revenues were R$ 219 million and net profit was R$ 26 million, a reduction of 6.3% and 21.3% when compared to 2Q13.

            In the first six months of 2014, net revenues totaled R$ 371 million, 6.0% lower than the first half of 2013. In the same period, net profit was R$ 17 million, 76% below the result of 1H13.

            The lower net profit is a result of lower revenues, the non-cash impact of the SELIC change on the NPV of receivables, non-recurring expenses associated to the spin-off of the back office from Gafisa and increased financial expenses.

For further information, please contact our Investor Relations team at ri@alphaville.com.br or +55 11 3030-6314.

 

 

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OUTLOOK 

First half launches totaled R$949.1 million, representing 41.3% of the midpoint of full year guidance. Gafisa segment accounted for 70.5% of launches and Tenda represented the remaining 29.5%.

 

Table 39. Guidance - Launches (2014E)

 

With the completion of the sale of the Alphaville stake in 2013, the Company entered 2014 with a solid liquidity position. As reported in this release, the Company’s Net Debt/Equity ratio has remained stable at 44.9% since the beginning of 1Q14. Given this result, and considering the Company's business plan for 2014, the Company expects leverage to remain between 55% - 65%, as measured by the Net Debt/Equity ratio.

 

Table 40. Guidance - Leverage (2014E)

 

The Company is also providing guidance on its administrative structure. Administrative expenses as a percentage of launch volumes for the Gafisa segment are expected to reach 7.5% in 2014. Tenda has no guidance for this indicator for 2014, although for 2015 the Company expects the ratio to reach 7.0%. Please note that this guidance is conditional upon market conditions and overall demand for launches.

 

Table 41. Guidance - Administrative Expenses / Launches Volume (2014E) 

 

Table 42. Guidance - Administrative Expenses / Launches Volume (2015E) 

 

Finally, the Company defined as a benchmark for profitability the Return on Capital Employed (ROCE), and it expects that in the next three year period, this ratio shall be between 14% - 16% for both the Tenda and Gafisa segments.

 

Table 43. Guidance – Return on Capital Employed (3 years)

 

 

 

 

 

 

 

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31

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BALANCE SHEET TENDA SEGMENT 

 

 

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CONSOLIDATED BALANCE SHEETS 

 

 

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CASH FLOW  

 

 

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GLOSSARY 

Affordable Entry Level

Residential units targeted to the mid-low and low income segments with prices below R$200 thousand per unit.

Backlog of Revenues

 As a result of the Percentage of Completion Method of recognizing revenues, we recognize revenues and expenses over a multi-year period for each residential unit we sell. Our backlog of results represents revenues minus costs that will be incurred in future periods from past sales.

Backlog of Results

As a result of the Percentage of Completion Method of recognizing revenues, we recognize revenues and expenses over a multi-year period for each residential unit we sell.  Our backlog represents revenues that will be incurred in future periods from past sales.

Backlog Margin

Equals to “Backlog of Results” divided “Backlog of Revenues” to be recognized in future periods.

LandBank

Land that Gafisa holds for future development paid either in cash or through swap agreements. Each decision to acquire land is analyzed by our investment committee and approved by our Board of Directors.

LOT (Urbanized Lots)

Land subdivisions, or lots, with prices ranging from R$150 to R$600 per square meter.

PoC Method

 

Under Brazilian GAAP, real estate development revenues, costs and related expenses are recognized using the percentage-of-completion (“PoC”) method of accounting by measuring progress towards completion in terms of actual costs incurred versus total budgeted expenditures for each stage of a development.

Pre-Sales

Contracted pre-sales are the aggregate amount of sales resulting from all agreements for the sale of units entered into during a certain period, including new units and units in inventory.  Contracted pre-sales will be recorded as revenue as construction progresses (PoC method). There is no definition of "contracted pre-sales'' under Brazilian GAAP.

PSV

Potential Sales Value.

SFH Funds

Funds from SFH are originated from the Governance Severance Indemnity Fund for Employees (FGTS) and from savings accounts deposits.  Banks are required to invest 65% of the total savings accounts balance in the housing sector, either to final customers or developers, at lower interest rates than the private market.

Swap Agreements

A system in which we grant the land-owner a certain number of units to be built on the land or a percentage of the proceeds from the sale of units in such development in exchange for the land. By acquiring land through this system, we intend to reduce our cash requirements and increase our returns.

Operating Cash Flow

  

ABOUT GAFISA

Gafisa is a leading diversified national homebuilder serving all demographic segments of the Brazilian market. Established almost 60 years ago, we have completed and sold more than 1,100 developments and built more than 12 million square meters of housing under the Gafisa brand - more than any other residential development company in Brazil. Recognized as one of the foremost professionally managed homebuilders, Gafisa is also one of the most respected and best-known brands in the real estate market, recognized for its quality and consistency among potential homebuyers, brokers, lenders, landowners, competitors and investors. Our pre-eminent brands include Tenda, serving the affordable/entry-level housing segment, and we hold a 30% stake in Alphaville, one of the most important companies in the residential lots segment in Brazil. Gafisa S.A. is traded on the Novo Mercado of the BM&FBOVESPA (BOVESPA:GFSA3) and on the New York Stock Exchange (NYSE:GFA).

 

This release contains forward-looking statements about the business prospects, estimates for operating and financial results and Gafisa’s growth prospects. These are merely projections and, as such, are based exclusively on the expectations of management concerning the future of the business and its continued access to capital to fund the Company’s business plan. Such forward-looking statements depend, substantially, on changes in market conditions, government regulations, competitive pressures, the performance of the Brazilian economy and the industry, among other factors; therefore, they are subject to change without prior notice.

 

 

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SIGNATURE

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