Brazil builder PDG aims to end repeat cost overruns

Aug 14, 2012, 11:51 AM EDT

* Second budget revision in three qtrs triggers net loss

* CEO Grabowsky acknowledges loss of credibility

* Brazil's No. 1 builder delays 25 pct of 2012 deliveries

* Cash burn accelerates, CEO sees impact in second half (Recasts with executive comments, details of results)

By Brad Haynes

SAO PAULO, Aug 14 (Reuters) - Brazilian homebuilder PDGRealty has scrutinized cost problems at each of itswork sites, but cannot rule out another budget revision like theone that caused its second net loss in three quarters, thecompany's chief executive said on Tuesday.

"Unfortunately our day-to-day problems have made us losecredibility. You think you've got a better cost estimate andthen you have to correct again soon afterwards," Chief ExecutiveZeca Grabowsky told analysts on Tuesday.

The latest round of runaway costs led PDG, Brazil's biggesthomebuilder, to book a second-quarter loss of 450 million reais($222 million) late on Monday, missing forecasts for a profit of85 million reais in a Reuters poll.

"The new budget should hold up for a long time. If there aresurprises we'll make eventual revisions from quarter toquarter," Grabowsky added. "But we don't expect to need anotheradjustment."

Investors are hungry for evidence that PDG and its rivalshave gotten a handle on construction delays and labor costsafter years of poorly controlled growth that has underminedconfidence in their execution.

PDG's shares fell 2.7 percent in Tuesday to 3.29 reais,while the benchmark Bovespa index was little changed.



Several analysts had warned of more unforeseen cost overrunsat PDG, which has been forced to cut planned building starts inhalf as it struggles to deliver units on time.

With demand cooling and fewer new units for sale, PDG sawrevenue drop 38 percent from a year earlier. PDG's sales oversupply, a gauge of demand known as sales speed, fell to 23percent, the weakest since the fallout from the global financialcrisis at the start of 2009.

"May was awful and July was weaker because of holidays, butAugust is looking better," Grabowsky said, adding that demandcontinued to vary significantly by region.

PDG said it would have managed a slim profit in the secondquarter were it not for cost overruns that exceeded budgets by478 million reais.

The latest budget revision, following a similar adjustmentjust six months ago, reflected the runaway cost of labor andbuilding materials at one-third of construction sites, more thanhalf of which resulted from outsourced construction.



PDG also said building delays would push back delivery ofnearly a quarter of the units originally scheduled to befinished this year.

The builder said it now plans to deliver between 28,000 and30,000 units in 2012, down from a forecast for 38,000 units atthe start of the year. PDG delivered just over 10,000 units inthe first half.

"Our expectations are more realistic from here on,"Grabowsky said. "In 2013 we'll return to the level of 32,000 to35,000 (deliveries)."

Without as much cash flowing from delivered units, PDG's netdebt grew by 410 million reais, accelerating so-called cash burnfrom recent quarters. Grabowsky said higher cash burn wouldcontinue to hurt financial results in the second half of 2012.

Net debt climbed 8 percent to 5.54 billion reais, equivalentto two thirds of PDG's equity. Given the likelihood of exceedingdebt limits in its obligations to creditors, PDG negotiated thewaiver of so-called covenants on three of its bonds until themiddle of next year.

Earnings before interest, taxes, depreciation andamortization, a gauge of operating profit known as EBITDA, fellto a negative 259 million reais, adjusted for stock options,missing an average estimate of a positive 236 million reais. (Additional reporting by Vivian Pereira; Editing by MaureenBavdek)