Good afternoon, and thank you for holding. Welcome to the teleconference of Direcional to discuss the results for the third quarter of 2017. Today, we have here Ricardo Ribeiro Gontijo, Vice President, and Carlos Wollenweber , CFO and IR. I would like to inform that this event is for analysts and investors, and it is being recorded, and all participants are on listen-only mode during the teleconference. Shortly, we will begin questions and answers when further instructions will be given. If any of you need assistance during the teleconference, please ask the help of an operator by pressing star zero. This teleconference is also being aired simultaneously over the internet by webcast and can be accessed at www.direcional.com.br/ri, where you can also download the PowerPoint presentation. The slide will be passed by the people who downloaded it, and the audio will be made available.
Before beginning, I would like to highlight that any forward-looking statements that may be done during this teleconference concerning the business factors of Direcional, targets, or financial goals are expectations or assumptions of the company and are based on currently available material. Forward-looking statements are not a guarantee of performance, and investors should understand that industry conditions, general economic conditions, operational factors may affect the future performance of Direcional and may lead to results that differ materially from the ones expressed in such forward-looking statements. Now, we would give the floor to Mr. Ribeiro, who will begin the presentation. Mr. Ribeiro, you have the floor, sir.
Good afternoon, everyone. I would like to thank all of you for taking part in our teleconference once again for the third quarter of 2017. I would like to begin this presentation by delivering the main highlights for the third quarter, which are on page three of the slides pack. We have ended the third quarter with a reflex of our change in strategy of the company, which now acts in segments two and three of MCMV.
The sales in this segment that closed in September of 2017 grew by 184% compared to the last 12 months in September of 2016. Our results in terms of appropriation has grown steadily since the first quarter of last year. The growth of our rec has attained 287 in the period, and the consequence is an increase in revenue as the works are being developed. This increase in revenue has been noticed in this third quarter, where our gross revenue grew by 9% compared to the second quarter of this year.
Revenues have been dropping in terms of the last quarters because of the change in the product mix, and this reversion with the beginning of the growth of new revenues will be essential to dilute and mitigate our fixed costs and in order for us to apply future increase in revenue. We have been growing as well in our growth margin, which you can see on the bottom right-hand corner. We would like to highlight that this growth in the growth margin refers to the incorporation of real estate. In the last five quarters, if we consider the non-recurring effect of impairment, which took place in one specific project in this quarter, our growth margin grew approximately by 20 percentage points. 27% in the first quarter and totaling 27% in the third quarter of 2017.
This mirrors our strategy of migrating from going to one and middle standard to the three and three segments. I would also like to highlight our speediness in acquiring land plots in MCMV that attained BRL 3 million this year. We have a land bank totaling BRL 8.5 billion for the two and three segments of MCMV.
Another relevant aspect is the investment we have been doing in our own sales force, which has grown 190% year-on-year due to the perspectives we have in boosting the MCMV launches. Going on to slide four. These are launches. We have launched in the third quarter BRL 150 million, 100% of which were for the two and three segments of MCMV. In the nine months that closed in September of 2017, Direcional attained a launch of BRL 519 million, a growth by 17% compared to the same period of 2016. Going on to slide five.
The third quarter of 2017, Direcional had net sales of BRL 169 million, which accounted for a growth of over 100% compared to the same period of last year. If we take into account the increase in MCMV, the growth has been even more significant, going on to almost 300%, and net sales went from BRL 132 million in this quarter, attained BRL 132 million in this quarter. When we compare the first nine months, net revenues grew by 110% compared to the same period of last year, growing to total BRL 565 million. If we consider only MCMV, this growth has been, if we only consider MCMV, the growth will be of over 200%. I like to spend a little more time on page six, which is on our cancellations. The growth of net sales that you saw in the previous slide took place despite the growth rates.
This shows that growth sales have had nominally a growth, which was even higher than the net sales. Basically, this was due to the movement of the company in migrating to MCMV segments two and three, and an improvement in sales in the average income segment. We had a significant growth in delivery of middle standards, and we are now having more deliveries in the following months to come. In this segment, we have had expressive numbers of cancellations totaling BRL 70 million in the third quarter. This has led to a 28% increase in the cancellation rates if we compare to the third quarter of last year. However, when we compare the nine first months of this year with the same period of last year, there was a drop in 20% of these cancellations.
From the moment we finish our works, all the sales are only recorded when the credit of the client is approved. So it is natural that throughout next year, because all our projects of middle standard will be finished, we will have probably a similar number of cancellations. A positive aspect is that we have been able to increase the pace of resales within the quarter. If you take a look at the chart on the left of the cancellations in the third quarter of this year, 79% were resold within the same quarter. Going on to slide seven. The speed of sales for Direcional has grown in the third quarter, hitting the 12% figure, which is a growth by 15% compared to the third quarter of last year.
In MCMV, we have hit a VSO of 18%, which represents a 10% growth compared to the same period of last year. In medium standard, it was 12%. was 18%, I am sorry. Going on to slide eight. Direcional has closed the quarter with almost BRL 1.30 billion in available products for sale, 48% of which in VGV are in MCMV, and 15% are products that are destined for higher income segments. We had a superior sales volume than the volume of launches. It is worth noting that we have been able to reduce the average age of our inventory, and this is more evident on the bottom right-hand chart in this slide. Going on to slide nine. This is our land bank strategy.
The third quarter was a quarter that we have a strong pace of acquiring areas for MCMV, and we have acquired BRL 1.1 billion in sales potential in these three years that closed in September. The average acquisition cost is very competitive with an average of 8.9% of the potential sales for the areas. I like to highlight that we have acquired a piece of land that was paid with cash in Rio de Janeiro in this quarter. It was an opportunity that came up despite having a policy of acquiring land, which are mostly through exchanges. At some opportunities, of course, we cannot let them go. This is an area which is very well located. We believe we will have a growth margin which is higher than the average that we have had in the MCMV.
Our expectations for approval in the short term is what we think will take place, and it made sense to pay cash for this land. We have closed the quarter with a land bank of a potential of BRL 13 million, BRL 4 million of which, BRL 4.5 million, for average standard and the rest for MCMV. I would like to give the floor to Carlos to talk about the financial highlights, and then I will be here for the question and answer session.
Good morning, everyone. Moving on with the presentation, slide 11 shows that gross revenue in the third quarter was BRL 210 million, a 9% growth over the previous quarter, mainly due to the higher volume of sales in the MAC segment, which totals revenue of BRL 72 million and an increase by BRL 30 million compared to the previous quarter.
This increase in revenue is a reflection of basically the improvements in sales due to the reduction in financing rates of retail banks and to the discounts given on finished inventories. With this, we were able to offset the drop in revenue in segment one, which decreased by BRL 15 million this quarter. On the other hand, MCMV segment two and three grew by 124%, whereas MAC segment one decreased 56% and 71% respectively. In the last nine months, we delivered a growth revenue totaling BRL 614 million. In the next slide, we have revenue per segment. MCMV two and three accounted for 40% of total revenue versus 12% in 2016.
Clearly, this share will continue to grow in the coming quarters, as shown by the incoming revenue from the segments, which grew by 19% this quarter and almost 300% in the year, totaling now at the end of this quarter, BRL 407 million. More importantly, we are delivering a robust gross margin of 35.4% for this product in the last nine months, while the service margin was 5.9% and the medium-high income segment was -2.2%. As said previously, this reflects the persistently high volume of cancellations and discounts on finished inventories. On slide 13, we present our interest-adjusted gross profit. This is clear that we have intensified our discount policy in the MAC segment, mainly in the city of Manaus, which we sold units in the Parque Ponta Negra, Tower 5, below the cost recorded in the inventory.
In the chart to the right, we can see this clear reflection of the aggressive policy of price and the volume of units sold. We sold 25 units alone in September versus an average of 2.3 units before this campaign. Therefore, the sales strategy generated the need for us to recognize an impairment of BRL 9 million in inventory. By stressing the sales price of all our inventory, we understand that the project in Manaus is the only one that could generate a negative margin in sales, and therefore, the impairment is restricted to this project. Discounting one-off adjustment, we would have a gross income of BRL 38 million, a 21% growth over the previous quarter and a 5% improvement in the consolidated margin. On slide 14, we present our SG&A. Our administrative expenses remain constant at BRL 28 million, representing 10% of gross sales.
In the year, there was a marginal increase of 2% in administrative expenses. Commercial expenses, on the other hand, increased by 7% year-on-year due to the increased sales and accounted for 6% of the PSV sold in the quarter and 5% in the consolidated year. In the next slide, we present the evolution of transfer using the cash criterion. Transfer in MCMV segment continues to grow consistently and in line with the increase in sales and the development of works. We received a total of BRL 110 million in the third quarter, where MCMV share was BRL 67 million, up 27% compared to the previous quarter of this year and 46% compared to the last 12 months. Meanwhile, the middle-high income segment decreased 20% in a year, representing a negative impact of cash generation totaling BRL 45 million.
This is motivated by a sales scenario that remains challenging in this segment and a volume of cancellations, which is still high. We would like to highlight that we understand that the cancellations should decrease substantially next year due to the conclusion of the medium income works by December 2017, except for three developments in the state of São Paulo. In the last 12 months, the volume of cash from the on-lendings remained constant. However, MCMV now represents 47% versus 32% in the nine-month period of 2016 of last year. On slide 16, we present our capital structure, which is very robust still. In relation to the third quarter of last year, we have kept the balance practically constant, closing the quarter with a leverage of 22.9%, which is slightly higher than the 18.6% recorded for the same period of last year.
In the nine months of the year, our cash burn was BRL 42 million, reflecting the reduction of revenue in segment one and the persistently high volume of cancellations as already mentioned. Lastly, the next slide shows our next moves. We have started the commercialization of another BRL 200 million CRI, also issued by XP in a continuous supply model. The use of the money will primarily be to replace financings, thus reducing the cost of the debt and lengthening repayment terms. Now I would like to give the floor back and open up for questions and answers.
Thank you. We will now begin the question and answer session, which is for analysts and investors. If you want to make a question, please press star one. If you would like to remove your question from the line, press star two. The questions will be answered in order. For journalists, please contact our press department with Daniela Naves through the telephone 3134315446 or via email daniela.naves@direcional.com.br. Please hold for us to collect the questions. The first question comes from Victor Tapia from Bradesco BBI.
Good afternoon, everyone. My question is on the low-income segment. It has been gaining strength in the company compared to last year. You have the margin that has increased. I think there is still room to increase this even more, especially when we speak of launches. I would like to understand and hear from you, what are the expectations for the fourth quarter and for next year? Land plots purchase are supporting this. Another thing concerning the other segments of average and high income, I would like to understand a little bit more about the Manaus and how was the discount policy applied and the sales picked up. What do you think will take place in this segment? What are the strategies that you want to pursue?
Hi, Victor. Speaking of segments two and three, which was your first question, our expectations in terms of margins are stable margins. I remember that we are having this movement in the quarters. Of course, that when you analyze our rec in the future income, where 80% is focused on two and three, as the mix is changing, 80% of the rec is two and three segments, and only 40% of the recurring income. It is natural that our consolidated growth margin will move towards our growth margin for segments two and three, because the percentage of income in this will continue to grow. Therefore, stable margins, but we will have a change in the mix, and therefore we will have a higher margin as these works are performed.
Concerning the launches, I would say that it is very clear. Due to the pace of the land plot purchases that we have been doing in the last two years, it is natural for you to see an increase in the number of launches. I would not say that the launches that we have done in this first nine months is not recurrent. We believe this will be superior if we consider the land acquisition pace. Of course, we are always aware of demand and the banks that finance. Therefore, we do not see a major challenge in terms of banks, and we are expecting a likely continuity of the growth pace of launches in the segments. Concerning the discounts, I will ask Carlos to speak about this policy and explain the impacts that they have caused.
As we know, the Manaus market is very challenging in the high and medium-income segments. We believe there will be a high number of cancellations in this project, and that is why we are giving a higher discount to sell at a lower. At a lower price in terms of squared meters in order to pick up in sales. In September, we sold more than we thought we would because of this discount policy, and this triggered a need to review the sales price and to replan the next quarter.
We are very comfortable with all the projects that we are doing in Direcional, even when we express, and we do have a discount policy which is more aggressive when the real estate is finished. But we know that this is a one-off effect. The only geographical area that we have, which is more complex, is Manaus, and we have two projects there, Ponta Negra and Splendor. Splendor, we have almost finished selling it, and we still need to sell in these towers of Parque Ponta Negra. But basically, this is what took place in this quarter. I hope I have answered your question appropriately.
Yes, it was clear. What you are saying is that there is a lot of inventory for high and middle income in other regions. From what Direcional understands, the only geographical region that deserves this impairment was North region. The other regions, do you understand that it is a matter of time and of macroeconomic scenario for you to get rid of your inventories?
Yes, we have Manaus. In this project, we have around BRL 100 million in inventory to be sold. The tower is the only tower that we understood that could lead to a negative sales margin.
Thank you very much.
The next question comes from Luis Stacchini from Credit Suisse.
Sir, good afternoon. I have two questions. Concerning segment two, could you provide more detail on the schedule of launches for the fourth quarter, and could you explain a little bit more of your approach in terms of cash now that you have a restriction in PJ? Are you launching projects in PJ? Could you update us on that as well? I would also like to explore segment one. There was a margin dynamics which suffered a little bit more pressure. Is there an effect that explains this? There was an announcement by the government that there will be more contracting in segment one, and you obtained the projects in the beginning of the year. What are the expectations for the second round of sales, if there is one?
Okay, Luis. The launches in terms of segment two, we are still very much optimistic. Nothing has changed in our launch policy despite this volatility that we had in September and October at the Caixa Econômica Federal. This volatility has basically been sold for products that were for segments up to BRL 4,000 family income. The projects are normalized now. Above BRL 4,000, there has been a certain difficulty.
Contractions are not being regular, but they are above and much better than October. We have been looking into projects with Banco do Brasil. We believe that this segment of around BRL 4,000 in income, where Caixa has had more challenges, is an actual segment where Banco do Brasil has an appetite which is closer. So we are looking at the possibility of launching with Banco do Brasil. Concerning segment one, the maths in this quarter has dropped. Revenue has dropped.
The pace of delivery, despite having improved when compared to the deliveries in terms of the government, which is responsible to assign the people who live in the unit. This has improved a lot in terms of the scenario we had last year. There is still a lot of slowness in these deliveries. We have, therefore, provisioned for the fourth quarter of last year. These deliveries are still hurting us because of these delays. I would say that for the upcoming quarters, we should not expect changes in segment one margin. Although we do have a project in Porto Alegre, which was contracted in the first quarter, which has an adequate margin to the expenses in these works. I believe this project will have an interesting margin that justifies it.
This higher margin will probably not be enough for us to increase the gross consolidated margin in segment 1 from now on. In this new announcement by the Ministry of Cities last week, Direcional now has two projects, one in Brasília, one in São Paulo City, and there is an expectation that we will sign these agreements as soon as possible. We are going to move forward with these projects. If those agreements are signed when they are, all you need to do is see the number of units of each one of them and the price of each. You will be able to calculate around BRL 120 million in sales potential. Of course, we cannot be sure if this will take place in the fourth quarter or in the first quarter, but we are working firmly towards these two projects.
Thank you very much, and good afternoon.
If you have a question, please press star one. Please hold while we collect the questions. The next question comes from Marcelo Motta from JP Morgan.
Good afternoon. Could you comment a bit on the sales expenses? Could you refine this more in terms of the scenario that is coming up? Will this continue to impact expenses in relative terms? The second question is, could you provide more detail on the land bank that was acquired in Rio in the short term for launches, can we work with 12 months, do you think, for the launch, so I can understand the margin of the project?
This is Carlos. Concerning commercial expenses, it is very much in line with the increase in the volume of sales. When we look at the average income segment, which gives us more comfort, so to speak, most of projects are being concluded and delivered this year. What hurts us more is for us to pay commission twice. When you send the unit, there is a cancellation, you have to resell it, and you have had commercial expenses with marketing and so on, and then you have to invest again on this in order to resell these units.
So this over cost is likely to decline because cancellations, we believe, will drop significantly when we look at the second half of last year. In general, commercial expenses are very much in line with the increase in the volume of sales, especially when we look at MCMV segments two and three. Your question concerning Rio de Janeiro, could you make it more clear? I did not really understand it.
If I'm not mistaken, you mentioned during the presentation that one of the plots that you bought in Rio was paid in cash and will have an above-average margin. I would like to understand how big this project is and how relevant it is.
Good afternoon. This project is not very relevant. Of the total of BRL 1 billion land that we have bought, it's not that significant. It's a project that will have a PSV lower than BRL 100 million. But since the margin will be very interesting, and the approval term, we believe, will be very short because it's a very simple project in terms of financing. It doesn't have to go into any process of dividing the lands. We believe that this will have a lot of speed here. We will receive, and our expectation is that this cash is returned quickly.
It made all sense to acquire it, because it's available in an area where there is no MCMV project. It made a lot of sense to buy it in paying in cash around BRL 5 million- BRL 6 million. Since we have around BRL 20 million in terms of cash, I think this is representative. This was based on a plot that will not be very significant because we are actually avoiding this across our projects. Another point I would like to highlight is that with Caixa Econômica Federal restricting financing of average and middle income using a modality Code IC when other banks finance the project. I believe that in September, the volume for Direcional was BRL 42 million, and this average standard segment was inferior of our targets because of this change in the Caixa Econômica Federal policy.
We have increased the amounts with private banks, and we hope this will normalize. So the impact of the price of land and the assignment of funds by Caixa Econômica Federal has affected us.
Can I make another question and ask how this fourth quarter expectations go? For example, in terms of the land plots, do you think that we will have an inflection in cash again? Or is it too early to talk about because of the credit restrictions?
Our cash generation is very much related to the segment in the average income segment. That is why we have been more aggressive in selling. We have a volume that is very representative for cash generation, around BRL 700 million in the portfolio of clients. Those assignments will be more significant because we have more deliveries in the third and fourth quarter.
With three projects that we have that we'll be delivering next year, we will close all the deliveries in the segments. In addition to the sales of units and inventory, where cash enters immediately at the moment of sale, and the bank pays the financed amount by the client. We don't know how much cash generation will be in the fourth quarter, but from now on, we believe that cash generation will grow, and our expectation is that it is very robust due to all the capital that is allocated in average income of works that are basically finished.
Thank you, Carlos.
Once again, if you have a question, please press star one. Thank you. The question and answer session is now closed. I would like to give the floor to Mr. Ricardo Ribeiro for his final remarks.
I would like to thank the attendants. Thank you very much. We are available through our IR department, and we believe that we will be continuing this DRE trend, which will show and make more clear the changes in our strategies to boost segments two and three in MCMV. We are very optimistic in terms of the upcoming perspectives in the segment, and will continue to invest in it despite the recent volatility. From our point of view, there is no reason why we should change our strategy for the time being. Therefore, I'd like to thank you all and wish you a good afternoon.
Thank you. The teleconference for the results of the third quarter for Direcional is now closed. Please disconnect and have a good afternoon.