Gafisa S.A.

Good morning, everyone and welcome to our Third Quarter 2021 Earnings Call for Gafisa, My name is Flavio Prieto. I’m the IR Manager and here we have Ian Andrade, CEO of Gafisa; and Guilherme Benevides, CEO of Gafisa Construtora & e Incorporadora.

So at the end of the session we will have a Q&A. So before we begin, I'd like to inform you that this conference call is being recorded, and that questions may be asked in writing through our chat box.

Before we begin, I just like to say that these statements are subject to risks and uncertainties because they refer to future events, any changes in the economy and other operational results may affect the company's performance. The presentation is on your screens, and feel free to go ahead and change the slides as we continue.

So I'll pass it on to Mr. Ian, who's going to begin our presentation.

Over to you.

Thank you, Flavio. Thank you for starting our call.

First of all, good morning, everyone. Thank you for being interested in listening to our earnings call for the third quarter of 2021.

Continuing with the next slide, let's see some of our highlights. So starting with our highlights slide, our third quarter of 2021 has been marked, especially by the fact that we surpassed our launches guidance.

We've been recovering our growth. This is already factual -- this is already seen in our balance and our financial results.

And we're now reaping the fruits of this growth. So looking at all of the launches we have this year, we reached BRL1.7 billion year-to-date, which surpassed our guidance that was BRL1.5 billion to BRL1.7 billion.

Benevides will tell us about our products, the quality of the products that we launched, the sophistication they have, their position and we'll go into each product because we're surpassing our guidance, because we were very selective, we had good criteria and we did very well with our launches. So we did not let go of our criteria and we did not forget our standards.

So we are overcoming our guidance, but the way we did it is as important as our results. Sales increased by 11% versus the third quarter of 2020.

Our net revenue also reflects an increase of 12%, which is very similar to our sales figure versus the third quarter of 2020. Our gross profit had an increase of BRL66.2 million, a growth of 171%.

It basically tripled our gross profit from the third quarter of 2020. Gross margin, as a reminder, this is the most basic indicator showing the health and profitability of our company's projects.

Our developer, Gafisa is a real estate platform. But our core business are balancing our revenue and results is based on the development company's performance.

That's our main business and the gross margins indicate the quality of our projects. So this is going up quarter-by-quarter.

As you can see, margins are going up and that's not happening by chance. The new projects that we have with the new Gafisa are much better and they're presenting much better margins than the results we were seeing until last year.

So this quarter, we reached nearly 40%, and during the financial part of our presentation, I'll go deeper into our gross margin figures and tell you about our future perspectives. Our net income, our bottom line was BRL32 million in the first 9 months of 2021, which is up from the first 9 months of 2020.

We had posted a loss last year. So it went up by BRL137 million.

So this again reflect our improvement, our continuous attention to our operational factors and how our financial highlights are capturing the results of that. In our earnings release, you can see that we are in the fourth quarter in a row posting a profit.

In the last 12 months, our net profit was BRL62 million, which is a very important fact because we had not had four quarters in a row that is an entire year of profitability since 2015. So this is being reflected and is being captured in our financial indicators and looking at new businesses and new business lines.

Gafisa Capital, which is our real estate development branch, which was started in the company in the last 3 or 4 months has already captured BRL250 million from investors for our next projects. And I'll tell you more about these transactions soon.

We're going to be talking about the quality of our investors and the projects that received these investments. So after these highlights, I'm going to pass it on to Benevides, our CEO or the CEO of Gafisa Construtora e Incorporadora, and he's going to tell us some more about our operational results.

Thank you.

Thank you, Ian. Good morning and welcome everyone to our earnings call.

I have the pleasure of seeing that we are returning to our capacity of releasing or launching new products. We have already reached our -- or surpassed our guidance.

We had BRL1.6 billion in launches and pre-launches. And we have Flow Nestor Pestana and Marajoara Club House, a project that had over 147,000 in PSV, and many others as you can see here on the slide.

Vinci Sabiá and Tonino Lamborghini is our first branded building and a partnership with the Tonino Lamborghini brand. So that reinforces our strategy as a company that is going to be connected to luxury lifestyle and design brands, which add value and generate value for our projects.

Continuing on Slide 8, during the third quarter, we reached gross sales of BRL160 million, 12% up in sales versus the third quarter of 2020. In the first 9 months of 2021, we had BRL500 million in gross sales, BRL384 million in net sales, and it went up 132% versus the first 9 months of 2020.

Our gross sales break down. As you can see 15% has been delivered, 31% is under construction and 54% represents new launches.

Continuing with Slide 9. Over the last 12 months, Gafisa launched BRL1.6 billion and closed over BRL650 million in net sales.

On Slide 9, you can see our inventory, which closed the third quarter of 2021 at BRL1.5 million. This consolidates our position in the two biggest areas of the country, São Paulo and Rio de Janeiro, where we have 64% of our inventory in São Paulo and 29% in Rio de Janeiro and 4% in other regions.

The next slide shows how Gafisa is managed through innovation. So -- or based on open innovation.

And this has been recognized by the fact that we are among the top 100 most innovative companies in Brazil according to PwC. This is a renowned survey that looks at 27 Industries in Brazil across all business areas, and Gafisa was among the top 100 most innovative companies in Brazil.

Also according to Istoé dinheiro, we got first place at innovation and quality in homebuilding. So that is a recognition of the company's management and this is based on data information and innovation.

I'd like to thank all of you for listening, and I'll pass it over to Ian Andrade again. Thank you, Ian.

Thank you, Guilherme. As I said, it's not about reaching our goals, but the way we reach them is very good.

So that is really driving us and it shows how assertive we've been in our initiatives. So we're performing on sales and construction work, and through innovation.

So our innovation is really creating synergies with what we do at the very end. So this is what's driving our success.

We're having launches, we're building we're selling, our platform is very well structured. And since we are so dynamic, since we're becoming a real estate platform to live and to invest.

After all, Gafisa is making history and creating connections. So in that holistic point of view with our platform, we have to look at Gafisa Capital.

This is a branch we just created in the company a few months ago that aims to go beyond and open to the investment market, a participation in Gafisa assets. Up until a short while ago, the capital market that is whatever investor wanted to invest in Gafisa could only buy stocks and be in our ticker, but not everyone likes the stock market.

Many investors prefer to invest in projects, in assets, in real estate. So all of these possibilities in the real estate market is now being captured by Gafisa Capital.

So we're providing alternatives, that is alternative investments for the market so that investors can invest directly in our assets. So in a short amount of time, what did we get?

Just to recap, from the tactical point of view, we have two objectives to raise new investments and new resources for new business. So that is to support growth directly without of course forgetting our criteria or standards and also to recycle invested capital, which will foster new investment cycles.

So we have two examples already in these two objectives. So new investors in new businesses and investors recycling their capital.

So looking at new capital for new business, we structured a few operations and captured BRL100 million to acquire new land areas, which led to a total BRL500 million PSV in our land bank. These are premium locations that were selected and prospected by our operations area, our business area.

So we have BRL170 million in PSV in the neighborhood of Itaim, in São Paulo and BRL340 million in [indiscernible] which is a very good region that has a lot of liquidity, a traditional area and Itaim very well. I don't need to say anything more.

This is among the top areas of São Paulo and that it's very difficult to find land areas there. And that's due to several reasons, zoning, land competition and so on.

So taking a stand and well qualified assets with investment capital were one of the biggest pillars for Gafisa Capital is to have a long-term view of its investments. So Gafisa maintains a share of that investment.

So we have a mix of having some investment, having that exposure, but also developing businesses in prime areas. So we have two thirds to three quarters of the project.

So investors know that they'll be allied with our performance. So with new businesses, we originated BRL100 million in investments for new areas.

And in capital recycling, we structured BRL150 million to provide returns on invested capital. So we invested in these areas, we approved products out of these four areas, one has already been launched, which is Tonino Lamborghini, and we invest -- recycled capital and investments there, leading to a total of BRL800 million and PSV.

So we're always bringing that to the market, we are very selective. And that's always been our approach to bring investors in for our projects, whether they are for real estate development, innovation, new projects, investments connected to real estate services.

So there's a range of businesses that we have in our company, and Gafisa Capital is a conduit for the financial markets to access these opportunities. And it shows how assertive our model is, because we've been able to carry out these operations and also validate the good projects that we have in our portfolio.

Whether it is our current portfolio or prospecting portfolio. So continuing with the results for this quarter, and going a bit deeper into our financial results.

Our net revenue increased by 100% in the first 9 months of the year. In 2020, it was BRL305 million and in 2021, it's nearly BRL600 million.

So we really doubled in 9 months the company's net revenue. Again, financials is capturing operational results.

For the quarter, we had a 12% increase quarter-to-quarter. Gross profit increased by even more.

So 170% and a quarterly view or in a 9-month view. So when you look at these results, of course, our gross margins went up, and we'll look at how that margin is doing on the next slide.

And that's essential, it's pivotal for us to understand how the company is behaving. And our bottom line, our net income, as I said before, in the 9-month comparison, we had a delta of BRL140 million from a loss of BRL105 million to a profit of BRL32 million, which means four quarters in a row in which the company has posted a profit.

The next slide, Slide 16 shows that specific point, our gross margins. This quarter it reached 40%.

Our adjusted gross margins reached 45% when we remove the financial effects and expenses that are included in our production cost according to accounting standards. So gross margins are reflecting our projects.

This quarter, I'd say that we were recognized by our profits, and it really reflects how the company is doing this quarter. But on a normalized basis, this gross margins will be between 33% and 35%.

So why am I highlighting this caveat? That 33% to 35% on our gross margin, because well, in this quarter, there was a concentration of revenue on the [indiscernible] sales, which is a project that has very high margins.

As was said, it really went above the 100 million -- excuse me, BRL100,000 per square meter values. So we sold two units this quarter.

So we really have to look at our revenue this quarter from a different standpoint, because it was very concentrated on these projects above our historical average. And I'm not sure if this will be replicated in the next quarter's.

I'm not sure if we'll be able to continue posting these results from projects that are so good as [indiscernible]. The good news is that our gross margin continues to trend upwards.

This is the result of new projects that are better than the previous one. So this is very clear and what we're seeing in the graph.

We have gross margins around the mid 30s. And continuing on the next slide, Slide 17, we see how our balance has remained solid.

For one more quarter, it has remained very good with good leverage. A slight reduction when we look at our Gafisa Propriedades debt, which is a debt that has a different composition than the development part.

But the snapshot I'm showing you has remained stable for the last quarters. And what does it show?

95% of the company's financial debt is based on projects or developments or based on projects from Gafisa Propriedades. So their long-term debt, which fits to our cash flow in here, I'm talking about properties.

And in the development company, it's based on the projects that are being built that will be passed on soon. Our receivables portfolio is still at a very good level.

So this snapshot shows our cash, our liquidity and our receivables versus our debt, and it's a positive snapshot. And as you can see, our debt profile carries very low risks of being refinanced or paid, because they're connected to how our projects perform.

To conclude on the financial side, here on Slide 18. On the operational side, we wanted to show you that 12-month view breaking it down per quarter.

As you can see, as launches recovered, as sales recovered, we are at a level of -- of over BRL1 billion. Sales are performing very well.

So from the financial side, we can see that revenues in the last 12 months were BRL1.17 billion, while gross profits amounted to nearly BRL300 million. And the bottom line reversed our historical series that we're going into losses.

So it's at BRL62 million. If we were to look at this graph, 2 years ago, in 2019, it was around BRL400 million in losses in the last 12 months.

So we went from a loss of BRL400 million in the last 12 months in 2019 to BRL61 million in profits. So that shows a high difference.

It's very strong, and it financially reflects the company's operational performance. So with that being said, this concludes the structured part of our presentation.

We're now open for questions. And once again, you can send us your questions here or you can interact with us on LinkedIn via email.

And I hope that our interaction with the market and we few investors will continue beyond this call. But of course, we're open to answering all of your questions.

But that being said, I'll pass it back to Flavio who will organize our Q&A session. Thank you.

Good morning, everyone. Once again, so we've received a couple of questions such as this one from Carlos Herrera from Insider Research.

He mentions how interest rates are going up and he's asking about our expectations and how that will impact the company's margins?

So good afternoon. That's a good question.

Higher interest rates affects the entire economy. So this would not be different in real estate.

We have been feeling that impact in people's purchasing decision. So it's taking longer to convert sales.

But this is not necessary certainly seen in our margins, I'll let Guilherme explain what I'm seeing. But we have to understand how people are behaving and how sales are performing.

But to summarize, our financials are not being impacted by interest rates. Because our production had already been contracted, we're still -- we still have net positive results, we have good fees and good financial operations to finance our operations.

The biggest part of the impact is on people's expectations, and their fears because it's really impacting how they're going to finance their purchases. So it really impacts sales, but it doesn't impact our financial statements or our margins directly.

Just to add to what Ian said, we're working at a high income market. So, now has been very good as interest rates go up.

We see a lot of demand for our projects, especially the new ones, and they're very well structured, they're very well located. They have good designs, a lot of technology and they're very different from what we see in the same regions.

So, again, we see that our demand -- the demand is very high and buyers are of course, more concerned about their purchasing decisions. But demands have been very high.

And we've been very good in working with this market and with high quality products.

Carlos also asks, as we surpassed our launch guidance if the company will slow down in the new launches near-term?

Yes, thanks for that question. For right, the company has the capacity of continuing with its launches and staying on the same guidance.

As I said, we'll continue to launch 1.5 billion to 2 billion a year that can go up of course, we're being very cautious, we're -- we want to be responsible in how we launch new projects, but we do have the capacity to continue to grow.

Pedro Lobato from Bradesco asks about contract cancellations. This quarter that value was an outlier.

So is that related to units sold in the last cycle?

Yes, so these cancellations do refer to the last cycle. It's a legacy figure.

So we linked it to some sales that we inherited from a last management and we see that in our new launches cancellation levels are very low. So yes, it does refer to past events.

Just to add to Guilherme's answer, yes, these contract cancellations do refer to the previous cycle, but I'm getting ahead of the next question. So why are we seeing this now?

Why didn't the company inspect our receivables portfolio? We did look at that.

Our core concern is always to do that. But a lot of these projects are coming close to their conclusion dates.

So we have for example, we'll get back to [indiscernible], who's now receiving inspections, or issuing documents. So as these projects are being delivered, as you're inviting clients back to see them, it's very normal to have a spike in contract cancellations for these product -- for these kinds of products that are not so high quality.

So I just want to put that into context. We expected these contract cancellations from the previous cycle because right now we're delivering the -- our products, clients are looking at that and that leads to contract cancellations.

Yes, so [indiscernible] that we already had documents for and a large number of the units were a part of the company's legacy. So now with inspections, we are seeing some cancellations specifically on that product.

We had a question from [indiscernible], an investor in the company. He's asking about share discounts and what is still missing for that to be reversed?

That's a great question. So I will give you a personal answer.

When we talk about how the capital market is behaving, it's like looking at a crystal ball. Each person will give their own predictions and there's even theories on investor psychology.

It's really academic, but the entire industry is receiving a discount. Our peers, not only Gafisa is being priced down by the capital market, by the stock market by investors.

And unfortunately, our recovery, our position, which is an operational reality, it's seen in our results is happening at the same time as we see everyone being more averse to risk. So that really creates a challenge in repricing the company.

I'm a true optimist. I have my own convictions, and I control what I can control.

And what can I control as a Director? We need to continue doing good work, we need to have good long-term views and we need to be in constant communication with the market, we need to be very transparent.

And when the general feeling when the atmosphere changes, I believe that our discounts will be lower than what our peers are seeing. We hope that the market will be more welcoming to risk.

But I do think that there was some bad luck involved. Our turnaround, and the company's recovery, which is factual, which can be seen in our results is happening at as people become more averse to risk.

So it really is a pity, but we're going to insist on our current track.

We have another question from Pedro Lobato from BBI. He's asking about costs, if they're being pressured and what are our margin projections?

What are our expectations for the company's margins. He also asks about how you expect construction sites to evolve?

I'll talk a bit about margins and then Guilherme will tell you about more operational factors underlying our margins. But as I said, we expect margins to be maintained, whether it is by the product profiles, we have, our pricing, our [indiscernible] and how we control and monitor our results routinely, that's the top line.

From the cost side, we have our [indiscernible] that looks at supplies and procurement, but also production and projects. So we really are looking at our costs and we're very, I'd say religious and how disciplined we are.

We stand strong in how we price units. It's not only in launches, but every month we're looking at how each product is performing.

Just to add to Ian's answer, Gafisa had a situation in which most of it projects from the legacy cycle had basically all their contracts signed, construction was doing very well, physically that is. So we were not pressured in the last deliveries.

We didn't see any major surprises there. With new projects we have already budgeted at the right price, considering the final cost, and again, new products are very good locations in São Paulo and Rio de Janeiro, where you can still have good prices to maintain your margins.

That was also a very good decision. So a couple of points here.

We have a good control of our projects from the beginning. And when we look at how our projects are budgeted, this is redone every month, so that we can keep a track of our costs.

We also have many indicators in procurement and supplies, a lot of strategical partnerships with players. So we feel very comfortable about keeping the same prices.

And at the very end, we're talking about high added value projects in high value locations where values are going up, because there's a lack of projects and a lack of areas available there.

We have one more question from Pedro from BBI. He's asking about how we're going to position ourselves considering a more competitive environment and with all of the uncertainties that we see in the macro economic scenario.

Well, as we saw in our presentation, our debt is -- has a one-to-one proportion to our number of projects. So we don't have any corporate debt.

We have minimal working capital. So our debt will behave according to our new launches, to our volumes.

And besides that, there's really no -- I don't see that anything could surprise us and nothing's going to really remove us from that path. Our debt is based on the projects that are being launched and construction and with good quality assets.

So we always structure our capital based on projects and properties. They have good rates and it's all based on our long-term debt profile.

The last question we've received so far is from Rafael, a shareholder. He's asking the main challenges we see for Gafisa in the last quarter since our guidance has already been surpassed.

And he's also asking about interest rates going up.

I think our main challenge is to remain strong in sales. We need to continue in our strategy of gaining value, upping our margins and that balance between generating value and projects, but also having a good sales volume.

So that's our strategy and how we aim to capture clients with the entire clients journey, so that we can convert our journey into sales. That's still our hope for this year.

From the financial side, our main challenges, well, I'm going to refer to the question asked during the -- during our Q&A. It's reducing discounts in comparison to our peers or in comparison to the entire industry.

That's a challenge that's not going to only last until the end of the year. It's a constant obsession that the company or rather, I have, we really want to display the work, communicating what we're doing, showing the results so that we, or so -- Gafisa can be repriced in the market reflecting the quality and the financial health of the company.

This is our challenge for the rest of the year, and it will be continuous. But I have to reinforce that if we were to make it simple, from the operational side, its sales, sales, sales, and from the financial side, its capital market communication.

And even though people are more averse to risk, we really need to position the company to capture its position in the market.

The last one is from Rafael Shai [ph], a shareholder. He's asking about any expectations of M&A transactions, if there's anything that you're expecting in the company.

Well, M&A is always a strategic topic for us as we've said in the past. We always aim to have organic growth rather than M&As, but due to the nature of that business, we really can't go into details.

But, yes, we're always keeping an eye on M&As and we do have some things on our radar. We do, but we can't say anything about it yet.

With that being said, just as we're not letting go of our standards for new organic businesses like land areas, we're also not lowering our standards and our discipline and methodology for M&A growth.

So I'll pass it on Ian Andrade and Guilherme Benevides for their closing remarks.

Well, I like everyone for -- I'd like to thank everyone for watching once again. Something that just occurred to me, it was that I was very happy when I read some headlines today that's saying that São Paulo recorded zero COVID related deaths in the last days.

So that's a very positive scenario, just as Gafisa transformed itself in the last months, we're also seeing that the pandemic is ending. So I remember in last year, we had a completely different atmosphere than we do right now when we were talking about, health issues, our expectations and people's confidence.

So I'm very happy to see that death rates are going down, the pandemic seems to be better controlled. So, I'd like to wish you all good health.

I hope you're doing well and I hope this critical part of the pandemic has left personal and professional lessons that will make us more aware of our business and our personal lives and everything else. The company is posting good results.

We are aiming towards growth, we have very dynamic business units, we have our operational guidance met. We've started doing interesting transactions across all of our business units, like Gafisa being our digital service platforms.

Innovation recognitions from very credible and independent source sources. So at Gafisa, our entire management not only Directors, but our Shareholders, our Board has been running our businesses very well and we’re -- we really believe in the real estate market.

That's what I want to say. Thank you.

And I also want to extend Ian's comment, because we are very happy about the fact that the pandemic is under control, that people are able to go out and consume and death rates are much lower than the recent past. And I'd also like to say that we have been posting very good results, we've been adding value to the company.

We have very solid management, and we'd like to extend our congratulations to the entire company for their transformation through innovation. Innovation culture is really in our DNA.

So it's not by chance that we got the acknowledgement from PwC. I'm very happy to be able to transform the company through innovation.

And this is the future for any company in the world. We have innovative companies that have their innovations starting from the inside.

So we're on the right track with innovation, generating value and results for our shareholders. So thank you for listening.

And I'd again like to underscore that we're always available if you have any questions. If you are interested in the company, we're always available to show our company to you so that we can always be very clear and transparent in our growth goals and generating results for our shareholders.

Thank you everyone.

So that concludes our conference call. Thank you, and we'll see -- and have a good day.