February 27, 2014 / 4:10 PM / 4 years ago

UPDATE 1-Margins at Brazil's Gafisa seen up this year, CEO says

SAO PAULO, Feb 27 (Reuters) - Brazilian homebuilder Gafisa SA expects a measure of profit margin to rise by 2 percentage points this year as it continues to sell off older, less profitable projects, its chief executive officer said on Thursday.

According to CEO Duilio Calciolari, higher returns from newer projects will help boost adjusted gross margin, or the difference between revenue and cost before accounting for certain other costs, this year. Gafisa’s adjusted gross margin was 31.2 percent in 2013, up from 24.4 percent in the prior year.

“The phase-out of all the old projects we had with low margins is practically complete,” Calciolari said on a conference call with analysts to discuss quarterly earnings. “New projects will begin to have a more relevant presence, making our expectations for operational improvement quite positive.”

Gafisa has also been working to rein in expenses, cut debt and refocus on key markets since 2012 after a rapid expansion into untried regions led to huge cost overruns, sales cancellations and big quarterly losses.

Shares rallied on expectations that Gafisa is beginning to reap the benefits of a dractic turnaround it implemented more than a year ago. Free cash flow, or how much earnings reamins after payments to bond and shareholders, rose in the wake of strong unit delivery, a rise in Tenda units transferred to banks and reduced sales cancelations.

Shares of Gafisa were up 4.47 percent to 3.27 reais in afternoon trading in Sao Paulo.

Net income came in at 921.3 million reais ($393.7 million) in the fourth quarter, up from a 101.4 million reais loss a year earlier. While Gafisa’s quarterly results were heavily influenced by a one-time 1.5 billion reais income from the sale of its Alphaville unit, analysts were encouraged by a sharp rise in cash generation independent of the transaction.

Cash generation “was a very positive surprise,” wrote Credit Suisse Securities analyst Nicole Hirakawa in a client note. “While we are expecting the company to be more in cash neutral terrain for 2014, the fourth quarter’s cash generation, coupled with higher sales speed, decreasing sales cancellations and better margins, indicates operations could be more oiled than anticipated.”

Chief Financial Officer Andre Bergstein confirmed that cash generation should be neutral in the year, while warning that cancellations should rise in the first quarter due to a jump in project deliveries in the fourth quarter. By the second quarter cancellations should eventually settle back below the level seen in the final three months of 2013, Bergstein said on the call.

The company should launch 5,000 units in its low-income segment Tenda division in 2014, and reach an annual rate of 8,000 to 10,000 units in three years, Calciolari said, adding that he sees a stable market for homebuilders as Gafisa works to recover market share.

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