Good morning, and thank you for waiting. Welcome to the conference call of Direcional to discuss the results for the second quarter of 2019. Here with us, we have Mr. Ricardo Ribeiro Valadares Gontijo, CEO, and Carlos Wollenweber, CFO and IRO. We inform you that this event is exclusive for analysts as investors and it is being recorded, and all participants will be in listen-only mode during the company's presentation. After that, there will be a Q&A session when further instructions will be given. Should any of you need assistance during this call, please request the help of the operator by pressing star zero. This event is also being webcast via internet and can be accessed at the address www.direcional.com.br/ri, where the corresponding presentation can be found. The slide selection will be controlled by you. The replay of this event will be available shortly after it is finished.
Before proceeding, we would like to clarify that statements that may be made during this call regarding the business prospects of Direcional, projections, and operating and financial goals are based on beliefs and assumptions of the company's management, as well as on information currently available. Considerations about the future are not a guarantee of performance. Investors should understand that general economic conditions, industry conditions, and other operating factors may affect the future development and performance of Direcional and lead to results that differ materially from those expressed in such future considerations. Now, I would like to hand the floor over to Ricardo Ribeiro. Mr. Ribeiro, you may continue.
Good morning, everyone. I would like to thank you again for attending our call. Let us talk about the main points of the second quarter, and then at the end of the presentation, I will be available to answer any questions you may have, and things that are not clear during the presentation. We are here presenting the financial results of the second quarter of 2019 and the efficiency of Direcional, and the gains are becoming clear. We have delivered, in this quarter, the largest net income of the last three years of the company with a growth of 27% when compared to the net income of the first quarter of this year. We have also delivered the largest gross margin of the company since 2009 in levels 2 and 3 of MCMV. It reached 38%.
The efficiency acquired by Direcional in this period of crisis that Brazil went through, in addition to experience in operating in levels of the program in which the sales price were very low, have allowed us to now benefit from this reality we went through. That required several adjustments to be made. This efficiency is going to have a very good effect in the coming quarters. We have also BRL 107 million in cash generation, which is a good amount of the market cap of the company. We are very confident about our operation that has gained significant efficiency gains, and our main focus now is to grow our sales, so that the continuation of our gains of scale will allow us to continue to deliver continuing profit to our shareholders.
On slide number four, I would like to look at the company operations when we look at levels 2 and 3 of Minha Casa, Minha Vida. In the last 12 months, ended now and ended in last year, we had a growth of 42%, 31% in sales, 91.8% in net revenue, and 109% in gross profit. The revenue growth was accompanied by a growth in margin in this segment. This level of MCMV will continue to be the priority of the company in the next quarters, but we also see opportunities to, using the same efficiency we had in building in this segment, to start launches in the middle-income segment, and with a focus on transferring before construction such customers, which will allow us to continue to grow the company's operations without the need to increase working capital.
And will also allow us to have a significant increase in the return. On slide number five, the highlights of the second quarter 2019. When we look at the first and second quarter added, we may see that levels 2 and 3 of MCMV accounted for 85% of launches of the company, 94% of sales, and 80% of revenue. Year-on-year, you can see that this segment has become more representative. That started in 12% in 2016 and reached 80% in the first half of this year. In the second quarter, we delivered a gross margin of 12% in services, 23% in MUC, the middle-income segment, which was a significant growth, and 38% in MCMV. The growth in revenue has coming from this segment, allowing Direcional to grow, increasing its margin, and maintaining significant generation of cash.
This allowed us to be one of the main payers of dividend in the stock exchange in the first 12 months.
Ladies and gentlemen, please hold while we reconnect the speaker line. Ladies and gentlemen, please remain connected. Please remain connected. Please hold until we reconnect the speaker line. The speaker is now back. Connected again. You may continue, sir.
I am sorry. Ladies and gentlemen, please hold while we reconnect the speaker. Please remain connected while we hold for the connection of the speaker. Please hold while we get the connection of Direcional back. The speaker is now back.
Okay. We had a second connection issue, so now let's continue the conference call. Now on slide number six, I'll talk about launches of Direcional in the second quarter of 2019.
We've ended the second quarter with a growth of 43% in launches when compared to the same period of 2018, or rather when compared to the first quarter of 2019, and 53% when compared to the second quarter of 2018. In the first half of this year, our launches grew 38% when we compare to the last 12 months of last year. In the second quarter, we launched BRL 562 million, and BRL 81 million in middle income. Now talking about net sales, we've reached BRL 336 million in the second quarter of 2019, which is a growth of 17% when compared to the same period of the first half of this year. In net sales, we grew 10% when compared to the same period of 2018. In this year, 2019, the level 1.5 of MCMV was strongly impacted by the new rules announced last year.
Even despite these restrictive rules, we were able to deliver growth. In the first quarter of 2019, net sales reached BRL 624 million, of which BRL 586 million came from the program. On page eight, I will talk about the VSO. In the second quarter, the VSO of Direcional, looking at the MCMV segment, remains stable at 16%, at the same level of the first quarter. In the middle-income segment, we had a slight increase from 3% to 5%. The consolidated average VSO went from 13% to 14% in the second quarter. We are working strongly to implement processes to increase VSO even more. Today, this is the main priority of the company, and this is where the highest value will be delivered to results and shareholders in this year. Looking at inventory, we closed the second quarter with 10,000 units in inventory, 78% in MCMV and 22% in MUC.
The inventory of MCMV completed units accounts for only 1% of the total, which shows the assertiveness of our product. We closed the second quarter with a land bank of approximately BRL 22 billion, and slightly over BRL 17 billion coming from products that adapt to MCMV requirements, and the rest for middle-income segment. It is quite healthy and enough to allow our operation to continue to grow. It is important to highlight that most of our purchases of land come through swaps. This was very strong in this quarter, which exceeded 80% of the purchases. This is important because swaps allow us to maintain the safety of our operation and to maximize capital invested in our operations. The impact of this policy are becoming clear in the recent return we have delivered to the market.
Now, I would like to turn the floor over to Carlos to talk about the financial highlights of the quarter.
Good morning. It is a pleasure to present the financial highlights of the second quarter. I would like to highlight the consistent improvement of ROI in each quarter, a result of the growth of revenues and a growth of net margin, as shown on slide 12. We also delivered a consistent cash generation, which totaled BRL 89 million in the first half of 2019, accounting for FCF yield of 5%. As a result, sustained a DY elevated, maintaining a net debt over equity below 10%. On slide 13, we completed an important work of increasing debt maturity and reduction of carrying costs, increasing the average repayment term from 22- 37 months. We replaced short and more expensive debts to financing production for longer and cheaper debts in the capital markets.
The last CRI issued of BRL 250 million, and duration of four years, was financially settled on July 31st. The yield for investors will be 104% of CDI, and funds will be used to settle CRI of BRL 200 million issued in 2017, with the payment of principal and bullet interest in September. We closed the quarter with a cash position of BRL 966 million and a net debt of only BRL 106 million that accounts for only 7.6% of shareholders' equity. The efficiency of transfer has been key for the consistent delivery of cash generation. In the first half of this year, we transferred a total of BRL 681 million, 78% in the associative model. These transfers amounted to BRL 529 million in the semester, and this is a growth of 78% when compared to the first half of 2018.
The reduction of 5% in the year of MUC transfers, due to the largest amount of units completed and realized in September of 2018, and that's to DMAC. On slide 15, we have the evolution of the gross revenue amounting to BRL 756 million in the year and BRL 391 million in the quarter, a growth of 50% and 34%. Due to the increase in the share of revenue in segment MCMV 2 and 3, our gross income is growing at even higher rates, totaling BRL 243 million in the year and BRL 127 million in the quarter, a growth of 80% and 65%, respectively. In the next slide, we show the results of MCMV 2 and 3 separately. Gross revenue totaled BRL 607 million in the year and BRL 315 million in the quarter, a growth of 67% and 48%, respectively.
Due to the savings in the building construction costs allocated at the delivery of the developments, we had a growth in the gross margin of 3 percentage points when compared to the first half of 2018. So we delivered a net income of BRL 26 million. It's important to highlight in the next slide that the second quarter, we sold a land in Minas Gerais in the amount of BRL 19 million, which will be paid in 19 equal monthly installments, because we believe this land no longer fits our business model. This sale had a negative impact on the result of BRL 2.5 million. Therefore, the net income adjusted for this one-off impact would have been BRL 28.9 million, representing an annualized ROE of 9%. Let's now move on to the Q&A session. Thank you.
We will now start the Q&A session, only for analysts and investors. If you have a question, please press star one on your phone. If at any time your question has been answered, please press star two to remove it from the queue. Questions will be answered as they are received. Journalists, please get in touch with the press team, contacting Daniela Naves on the phone, 3134315446 or by email, daniela.naves@direcional.com.br. Please hold while we collect the question. First question is from Enrico Trotta from Itaú BBA.
Good morning, and thank you for the presentation. First question, talking about gross margin. Gross margin was a positive surprise, especially when you look at the levels of the segment MCMV 2 and 3. So there was a larger restriction to loans given by Caixa Econômica Federal. So it's harder to find customers and transfer such loans.
I would like to understand what we could see in margins for the future with the restrictions coming from Caixa. I believe this will have a negative impact. We see that the cancellations increased in the second quarter. Maybe it's a reflex of this more restrictive condition in MCMV market. Now the second question, now looking at the FGTS changes at the Government Severance Indemnity Fund. I would like to understand, what is your expectation regarding your budget for FGTS? Or do you believe you can still increase your share in the scenario in which the budget is a bit lower? Thank you.
This is Ricardo speaking, Trotta. Well, regarding our gross margin, I believe we have been able to deliver a very healthy gross margin. As I've mentioned in the call, the experience and learning we recently had in operating in level 1, which is very demanding in terms of efficiency in construction and capacity of execution. This has been a reality for us now that we have a level 2 playing a larger role in our business.
We have been able to maintain our operations at constant sales prices. We did not have an impact in our pricing based on these new conditions by Caixa. The highest margins we have believed, the main reason for those is construction with costs that were lower than those we had initially budgeted. Our productivity has increased by changing our building and construction process. Now we are building with higher quality, lower maintenance, and a more competitive cost.
When you look at the market, we have noticed a greater restriction in terms of credit analysis by Caixa, and we're making a strong effort in our sales to train the sales team before thinking about reducing prices in order to keep the VSO. We'll keep to this policy. We may make some specific adjustments in some locations, but I don't believe there will be a significant change in the gross margin, except for this one-off impact when we recognize a saving in the construction close to the delivery of the project. I think we'll be working with the gross margin for a period longer than the recurring gross margin in this segment. It would be around 33%-34% in this segment for a gross margin.
But here at Direcional, we'll make a strong effort to work as long as possible with gross margins higher than that given the efficiency in construction, because I don't see too much room for gains in prices. So efficiency will come from construction execution. I believe we are working with the right prices, and we don't see any significant changes that will damage our margin. Now, it's important for Carlos Wollenweber to speak, and then I'll talk about the rest.
Okay, talking about cancellation. We had a specific increase in this quarter due to the changes in level 1.5, and also because now for the development to be sold in level 2, that became effective as of March this year. Sometimes we started with a customer at a 1.5, and then we had to move this customer to level 2.
We had some cancellations, and that caused an impact on the VSO of the quarter. We believe this is not a recurring effect, but at the end of the day, we remain with a very good efficiency and the process of a credit approval of our customers. Although, as Ricardo Ribeiro said, we believe that the bank is a bit more restrictive in terms of credit analysis, but our policy is to only sell once the credit has been approved, and we don't believe the cancellations will increase. We remain in the level of the first quarter. When we look from the point of view that despite the change in the government and the change in the economic team that now defines the policies of the country, we see that they now see the importance and significance of FGTS for the popular housing area of the country.
More than 700,000 of these new families fit MCMV requirements. When you realize the need of a program so that these families are able to afford buying a house, I believe that the FGTS will now be used, including by this economic team of the country, for that purpose. In our point of view, although people are withdrawing from the fund, we can see that the liquidity position of FGTS that was announced, when it was publicly announced, is higher than we thought that the FGTS would have in June of 2019. A significant amount of the funds that are being distributed are being paid out because the balance of FGTS is higher than what they thought it would be. They should not have a significant impact of the program in the future, because in the future, these withdrawals will happen only once.
They also announced at the anniversary the possibility of withdrawing funds. But when you migrate to this withdrawal at the anniversary, it becomes more predictable when withdrawals will be made. They would occur once a year, and in a predictable manner. It is good because the population could use those funds to invest and cause the economy to pick up again.
I would like to highlight a very positive point, which was the payment of 100% of net income for shareholders. In the current context of Brazil, with interest rate levels as they are, the fund becomes the best financial application or investment of financial market. It has a yield that is higher than a savings account or a fund that is linked to the Selic interest rate.
The problems we had were coming from Brazil, were not from the FGTS distortions, but from interest rates that were completely crazy, 14%, 15%. That was wrong, and not to pay for the FGTS. Now, with the income distribution and the FGTS becoming more profitable, the fund, in addition to being fair, it yields the capital of shareholders, and it is a good investment. Something that must be mentioned is that FGTS does not finance companies. It is not a subsidized fund used by company. FGTS is used by customers to buy a product in a very competitive market. It is so competitive that gross margins of construction companies are falling. These funds, they used to be directed to some industries in FGTS. Because it is directed to the population as a whole, the context is different, and it plays an important role in the development of Brazil.
Okay. Thank you very much, both of you.
The next question comes from Victor Tapia from Bradesco BBI.
Good morning. On the question about fewer subsidies in the beginning of the year, you have been able to maintain your margin healthy. How the pro soluto of you is behaving for MCMV market? Have you increased this amount for the end customer, or do you think about doing that? Also, the second point is, after these changes in FGTS, in the severance fund, which made people less negative about the continuity of the program, this will probably continue to support a healthy operation from now on, as well as a solid cash flow. What do you think about the distribution of these funds generated from now on?
Hello, Victor. This is Carlos. Let us talk about pro soluto. We have a very conservative point I am not sure about that. The pro soluto of the portfolio will increase. In terms of sales volume, on average, we are working with 10% general sales as pro soluto, trying to concentrate that on the term of the construction. As we increase sales, it grows nominally, but it will not escape this medium percentage we are using. The default percentage is very conservative, and it is very low. We are making provisions in a conservative manner in our accounts.
But we do not think that rendering it flexible would be a tool to increase VSO. Ricardo mentioned that today, although VSO is a bit low this year when compared to the end of last year, we are able to deliver all developments 100% sold, except for 1% of our inventory, which is a specific project in Goiás that had been financed by a different bank in the past. We do need to have the license, the permit to really inhabit the property in order to transfer that contract. We have been very conservative, so we do not think about changing that policy.
Victor, in terms of cash generation, the goal we have at Direcional now is to transform the company as less intensive as possible in terms of needs for capital. We had a significant growth in revenue, generating a high volume of cash. This will continue to be our focus, to try to buy land through swap agreements. This year, we had a cash generation a bit higher than it should be, the recurring cash generation, because in the first quarter, MCMV had some interruptions due to the change of the team that is now managing our country. It is natural that adjustments are made.
What we did not generate in terms of cash in the first quarter was generated in the second quarter. The board of the company has defined traditionally in terms of cash generation, because we believe that we should not continue to deleverage the company significantly. We believe our indebtedness level is very good for the segment we operate on. The board has chosen to pay dividends to shareholders. Let us wait for the next board meeting, but it is likely that we will keep the same policy. I cannot assure you that, but this is what you have seen on a recurring basis.
Okay. Thank you.
The next question is from Gustavo Cambauva from BTG Pactual.
Good morning. I would like you to please elaborate a bit on these projects for middle-income segment, transferring before construction. How much do you think can be made in this segment within this industrialized construction model and transferring before construction starts? I mean, looking in the middle term, what would be the mix of projects of Direcional if you would separate in MCMV and medium and high income? Do you have any expectations for the middle term and how that mix would be?
Cambauva. We have clearly seen a greater appetite from banks for these middle-income operations. A reduction in the interest rate in the economy as a whole, of course, reduces even more the funds and the loans to finance such middle-income projects, considering that the savings accounts are very short source of funds. We need longer loan terms, 35 - 40 years.
Our pre-fixed interest rate is falling down, and it is being negotiated at 3.5. All banks need to obtain cash in the market to finance that, and the credit availability will be a natural accelerator for demand in this period. When you look at job generation in Brazil and income levels, this is a segment in which we have a significant growth opportunity given that the growth of MCMV as a whole is limited because the possibility of funding from FGTS is restricted. There is a growth of the segment as a whole and an opportunity for us to work on that level. It is hard to say exactly where this segment could lead to. Here at Direcional, we will only grow if we continue to maintain our efficiency. Otherwise, we will just turn our business riskier, and that does not make sense at all.
Provided that we keep our efficiency and we have capital to grow, we will continue to grow. The segment could again reach the levels that we had in 2013 and 2015, provided that the cash flow continues performing and the return on capital invested remains at the same level. It is okay to operate in the middle-income segment and higher than we are operating now, providing that the business model remains the same. Where the fund comes from does not matter to us. What matters is that we are in a healthy business. But we have to analyze the demand carefully. There are some private banks working also in this associative model, which is a winning model that removes a series of problems we see in the middle-income segment in the previous model we used to operate. But it is hard to make any forecast from now.
Let us wait and see how demand will be for the developments we have launched to have a clear feeling of this segment.
Okay. Thank you. In this segment, the gross margin that you operated in the VSO is very similar to what you have at levels 2 and 3. Maybe when you look at the profitability of these projects, is it higher or lower? How does it compare to levels 2 and 3?
Gustavo Cambauva, what we will seek in terms of gross margin and consequently net, because from gross margin down, the cost will be pretty similar. The margin will be similar when we approve a launch in that segment. But I remind you that the recurring gross margin, both of this level and MCMV, is a bit lower than what we released because we have efficiency of construction also.
But when we come to middle income at equivalent margin, what will guarantee the return is the speed of sales and transfer of contract. I believe that the speed of sales can be a bit lower than in MCMV. Therefore, the margins will be equivalent, but return slightly lower. But on the other hand, it is a bit too early to say, because what we saw in 2012, 2013, is the speed was higher because it was an untapped demand, whereas in MCMV, the demand is growing on a recurring basis. This untapped demand may mean a higher speed, a higher VSO in the beginning. But let us wait and see. But I do not think it will be very different from that. Pretty close.
Okay. Thank you very much and have a good day.
The next question is from André Mazini from Citibank.
Hello. Thank you for the call. My question is about the construction savings you had. If you could break down the cost ex-land between labor input, to say about the savings. I do not believe there is too much payroll pressure. Savings come from payroll, from labor costs, from input. How will it be in the future? Thank you.
Hello, André. This is Carlos. Basically, when we approve a launch of a product, since after we sell the unit, the price is fixed and will not change, we embed a projection of inflation in our quotes. What has been happening the last two to three years is that, this forecast did not become real, especially in labor costs. In materials, there has been a small pressure. Some materials, such as steel, have increased prices a bit, but their share in our budget is relatively low.
What is happening now is that all the inflation forecasts that we included in the quotes or budget at the end of the project, if it did not become real, this is removed from the result, and this is why our margins are slightly better than we believe would be the recurring margins from now on. As the economy picks up again, the level of unemployment goes down, and so on, there will be a reflex of inflation, a bit more adjusted in our budget when compared to previous inflation rates. But this is what we see for the future. I do not know if it is clear for you.
Yes, it is quite clear. Breakdown of ex-land costs, how much would come from labor and from other costs?
Well, it varies a bit because when you talk about the cost of land on top of VGV, it varies from 7% - 2%, depends on the level you are operating in, on the MUC or level 3. The production cost, labor and materials also varies according to the sales price of that unit. But on average, we are working on something equivalent to 3% - 5% of construction cost, ex-land within the budget.
Okay. Thank you. That is great.
The next question is from Marcelo Motta from JPMorgan.
Good morning. Could you comment on the initiatives to increase sales speed in the first quarter, the next quarter? Do you think about decreasing margin or prices or increase sales expenses? I would like to understand what could be improved in that area.
Motta, I think that the main point to increase VSO is in training our team on customer service to increase the conversion of the first contact into a sale, with growing launches and sales in the first half of the year. We will continue to train our team to increase the conversion rate, which will help to improve. Also, there is a significant investment to be made in the digital area. Today, our customers are different from customers we used to have 5, 10 years ago. The customers currently see our products in the different medias, so we are investing and dedicating our time to this topic as well. We believe that results will appear. I am optimistic about that. When we start to increase sales, the easiest way to do it is changing prices.
When you lower price, that of course may be necessary, but you hide a series of inefficiencies that, if corrected, could allow us to increase VSO without decreasing margin. We are working on that. Let us see what will be the results for the future. I believe we will try to increase VSO without reducing prices. Although, we do have some fat to burn in case we need. I would like to leave that for the end. I would not like to do that right now. I think it is too early in the process.
Thank you.
The next question comes from Fernando Quesada from Santander.
Good morning. This is Fernando Quesada from Santander Bank. Your decision to operate a bit on middle income and looking at your background of completed development, wouldn't the first investment be to sell inventory more aggressively and then think about doing something in that area? Or is there an opportunity in that level or something in terms of economic growth? I would like to understand your strategy a bit better in summary.
Fernando, your question is great, and it is very important to make it clear. The inventory we have of middle-income product, it is a completely different product from the product we want to launch in the current middle income. The middle income we have in inventory is in a price range that is higher than the price range we want to operate now. The construction-type entertainment area now in these new launches, we are going to see customers that are very different from customers that will buy our current inventory.
Also, the terms are different. The locations are different. Some locations are recovering, are picking up much faster than others. So we are going to operate in different locations, and launches will concentrate in locations where we do not have inventory of units now. What we are trying to address in launches is the segment above level 3 of MCMV. Today, level 3 has zero subsidies, and the nominal interest rate is 8.16, which is an effective interest rate of 8.5. There are private banks working in the middle income with interest rate of 7.99. So in my point of view, level 3 of MCMV does not make sense to be sold with FGTS. This should be directed to meet the needs of families that do need funds that are not met by the market.
As interest rates continue to decrease in Brazil, I hope this happens, we will have a migration of MCMV segment to the market, and I hope that in the future, the market can meet the needs of the whole market. This is not a current reality, but it is something we should aim for. So the middle income would be like level 4, whereas our inventory is above that.
There is one other thing I would like to add to that answer. Since we give liquidity to the fixed assets on our balance sheet, there is some land that were bought years ago, and now this land bank is becoming liquid by operating that level that Ricardo mentioned, that is slightly above MCMV level 3. We have a good DSO, and we are able to launch this land that is a part of the land bank and bring back not only the profitability to the project, but also return on the capital that was spent in the CapEx of buying the land.
Okay. Thank you.
Ladies and gentlemen, if you want to ask a question, please press star one. Please hold while we collect the question. Thank you. The Q&A session has now ended. I would now like to turn the floor over to Ricardo Ribeiro for his final remarks.
Well, I would like to thank you all again for attending. These questions at the end were very good and a very good discussion. We continue with our work with results that are better and better. Our results are growing quarter after quarter.
We still have synergies and a lot of gains to capture in the process of increasing our revenue. We are optimistic about the reality of the country from now on. New segments being opened with opportunities for the company. We remain available to answer any questions you may have with our investor relations team. Thank you very much again, and have a good day.
Thank you. The conference call for the results of the second quarter of 2019 of Direcional has now ended. Please disconnect your lines now. Thank you, and have a good day.