Good morning, and thank you for standing by. Welcome to Direcional's first quarter 2017 earnings conference call. Today with us, we have Mr. Ricardo Ribeiro Gontijo, Vice President, and Carlos Wollenweber, CFO and IRO. We would like to inform you that this event will be exclusively to analysts and investors and is being recorded. All participants will be connected in listen-only mode during the company's remarks. After that, we will start a Q&A session when further instructions will be provided. Should you need assistance during the call, please request the help of an operator by pressing star zero. This event is also being simultaneously broadcast over the internet at www.direcional.com.br/ri. The slide presentation can also be followed at that URL. You will be able to control the slide selection as well. A replay of this event will be made available right after the end of the event.
Before moving on, I would like to mention that forward-looking statements made during the call concerning the company's business perspective, operating and financial targets are based on beliefs and assumptions on the part of the company's management, and also on information currently available. Forward-looking statements are no guarantee of performance. Investors should have in mind that general economic conditions, industry conditions, and other operating factors might affect the company's future performance, and thus lead to results that will differ considerably from those stated in these forward-looking statements. Now I would like to give the floor over to Mr. Ricardo Ribeiro, who will start the presentation. Mr. Ribeiro, you have the floor. You may proceed.
Good morning, everyone. I would like to thank you all for participating once again in our earnings release call. We are now going to be talking about the highlights of the company in the first quarter of 2017.
I would like to start by the main highlights, actually, which can be followed on the company's operating results on page three of our presentation, slide number three. Before moving through the main points, I would like to highlight a very important aspect, which is the return of our gross margin for our segment, which are back to recurring levels and expected levels for this segment. Especially after we announced a non-recurring result in the fourth quarter of last year, which was impacted by some unexpected events we went through in the end of the year, which eventually placed a burden, the delivery of some units in the level one range. As I said, we expected this gross margin to recover more normal quote-unquote levels, and that is what we saw happening in this first quarter.
I would also like to highlight a very considerable growth we have seen in the segments two and three of the MCMV program. We reached in the past 12 months, which closed now in the first quarter, a growth of 165% in launches when compared to the level of launches in the same period of last year. We closed the month of March with BRL 685 million of launches only in the Minha Casa, Minha Vida segments two and three in the past year. Those numbers are very much in line with what we have been looking to do in the company. We closed the first quarter of 2017 also with an inventory, which is much more adjusted to our market reality.
Which today we have 44% of our units or of our sales volume expected for those units allocated to the MCMV segment, which is extremely important for us to be able to deliver the results we expect to deliver this year. Another important and positive aspect of our operation has been the recurring reduction in the level of cancellations. When we compare cancellations in the first quarter of this year with the first quarter of last year, we see a reduction of 60%, and we closed the first quarter with cancellations at BRL 35 million. Moving on to the next page four of the presentation. We have very relevant data on that slide. On the left side of the slide, there is a chart I'd like to highlight the growing importance that the segments two and three have had on our revenues.
The percentage of our revenue coming from those segments moved from 5% in 2015 and closed the first quarter now at 29%. I'd like to emphasize very eloquently the fact that we are presenting gross margins, which are quite healthy in the segment. We closed the first quarter with a gross margin of 35%. For again, for the segments two and thrree of the program. When we look at the chart on the right-hand side of that same page, it becomes clear that the growth of the appropriated revenue when we analyze the development real estate isolated. In other words, segments two, three, and middle income, we exclude from that chart level one from MCMV. That growth has come in from our growth in sales.
More importantly to that growth in our revenues to appropriate is the fact that that growth is coming from the MCMV segments, where margins are much healthier. When we analyze the MCMV isolatedly, the growth was of 130% in the last two quarters alone, which is a clear indication of what we should be presenting in terms of revenue and margins as the civil works of those segments start a stronger pace. Moving on to the page number five, talking a bit about launches for this quarter. We launched BRL 123 million, 100% based on the MCMV program. When we consider MCMV alone and compared that with what was launched last year, we saw a growth of over 170%. Moving on to the next page, we're going to be talking about our sales.
In the first quarter of 2017, we saw net sales of BRL 134 million, a growth of 13% when compared to the first quarter of 2016. When we compare to the fourth quarter of last year, we saw a drop, which was expected in sales, especially driven by a very slower quarter, which is a recurring fact in the segment throughout our history. When we analyze the MCMV again in an isolated manner, even with the lower level of launches in the first quarter, when we compare that to the last quarter of last year, we still see a growth of 2% in sales. We compare that with the same period of last year, we saw a growth of 17%. In this first quarter, the average standards showed a decrease in the launches.
That is something that called our attention, and we are already taking all the necessary measures to circumvent that situation. On slide number seven, we have cancellations. I would say we have been delivering very positive news on that front. We see a considerable drop in the level of cancellations, 60% of drop, and we closed this first quarter with BRL 35 million in cancellations, as I mentioned in the first page. The change in the company's strategy, we are now prioritizing the launches of products where the transfer happens prior to construction at the moment of sales. That has been crucial for that reduction in the cancellation levels. Those cancellations are also concentrated in the average income or middle-income segment. We are now concentrating our launches in the southeastern region. Consequently, it is only natural that the cancellations are also concentrated on that region, the southeastern region of Brazil.
On page eight also brings important information. I would like to emphasize that it is quite clear if we look at the curve for our VSO, the major difference we have seen in the velocity of sales, both comparing the MCMV and other segments as well. Of course, the MCMV has been proving to be the most adequate to the current Brazilian real estate market, not only because of demand and because of the availability of funding, but also because credit for the client is being approved at the moment of sales. So we can be sure that is the real velocity. Because usually, those figures presented in the past years were not real because of the high level of cancellations that middle-income segment has experienced at the moment of delivery.
It is also important to emphasize that despite the fact that the chart shows a drop in VSO for launches, that does not reflect reality. Our launches were, again, concentrated on MCMV, but that happened at the end of the month of March. So we have not had time to account for all the sales which happened in that segment. On page number nine, we have the inventory. We closed the first quarter with BRL 1.3 billion in units available for sale. Out of that volume, 44% falls under the MCMV program. Also, I would like to reemphasize that our inventory has had its average age reduced. In the first quarter of last year, 29% of our inventory had less than one year. Today, more than 40% has launch date below one year. In other words, it is a newer inventory.
Another important piece of data is the fact that our inventory is mainly located in the southeastern region of Brazil, 70%, where we have a higher demand and a higher level of credit approval by banks. So that shift has been quite important, and we will be reaping the benefits of those shifts in the coming quarters. The next page number 10. I would like to emphasize that we closed the first quarter of this year with the total land bank of BRL 11 million in sales potential, BRL 5.7 million of which are allocated for the MCMV. In the first quarter of the year, we purchased plots with sales potential of around BRL 340 million, all of which, again, destined for the segments two and three of the MCMV program.
I'd like to give the floor over to Carlos now, who will be addressing the financial results of the company which are present in our balance sheet.
Good morning, everyone. Moving on with our presentation on slide 12. We see the gross revenue in the first quarter, which was BRL 212 million, which meant a drop of 51% when compared to last year. It's very important to understand, on the right-hand side of the slide, of the total sales in the quarter, 81% refers to the MCMV segments two and three. But those projects are still the beginning of the construction cycle. That's very important to understand. In the final results, 29% of the revenues we appropriated came from that segment. Moving on to the next slide, that becomes even more clear.
Our revenue, as you can see, and the revenues to be appropriate, we saw an evolution of 3% in that revenue. The accounting of that in our balance sheet includes all units sold, which have not gotten into the construction cycle. If you look at the MCMV segment, two and three, that increase was of 33% in this quarter alone. It's important to emphasize, as it was said by Ricardo before, that margins we are now delivering for that segment range from 33% and 35%. More importantly, we have no risk of cancellations. As it was said before, those units are transferred to the bank at the moment of sale. Moving on to the next slide and talking a bit about level one.
As I explained in the previous quarter, we are now in the process of concluding the delivery of projects, so the revenue will drop in the coming quarters. On the right-hand side, it's clear that works are almost done, and we are confident in delivering those projects within plan. It's also worth bringing that that segment was exceptional for our results and cash generation delivered by Direcional. On slide 15, we have our gross profit adjusted by construction funding, which reached a level of BRL 32 million with a margin of 16%. That gross margin was impacted by a reduction in the volume revenues, as we explained in the previous slide, and also by the gross margin, which has been affected by cancellations, which even though are lower, they still hit the results, and also discounts granted for average income units.
However, we are confident that for the segments two and three, works will grant us a consistent and sustainable growth for our margins. Despite the fact that we have reduced our SG&A last year to the tune of 70%, nominally speaking, our BRL 32 million profit was not enough to cover expenses. Because of that, we had a loss of BRL 23 million in the quarter. On the next slide, I'd like to highlight the evolution in our volume of transfers in the MCMV segment, which grew 50% when compared to last year and represented BRL 36 million in this quarter. Also, considering the average income segment, we have transferred BRL 105 million in the quarter. Moving on to slide 17. We have in the quarter a cash burn of BRL 49 million.
Another important piece of data is to try and understand that 65% of that cash burn came from investments, both in acquisition of lands and in the purchase of shares in projects. We closed the quarter with a cash position of BRL 450 million and an amortization level for our debt. That cash position of BRL 450 million, as I mentioned, resulted from the cash burn of BRL 49 million, plus a payment of debt of BRL 69 million in the quarter. Lastly, in the last slide, we see our capital structure, which is extremely comfortable with a net debt over equity of 23%. If you do not consider funding which has already been contracted, we have a net cash of BRL 194 million. We can now move on to the Q&A session. Thank you.
We now start the Q&A session, which is exclusively for analysts and investors. To ask a question, please press star one. If at any moment your answer has been answered, press star two to remove your question from the queue. Questions will be taken in the order that they are received. If you are a journalist, please contact our press office through Mrs. Renata Mattos at 31 3431-5442, or by email, renata.mattos@direcional.com.br. Please hold while we collect the questions. Thank you. Our first question comes from Mr. Enrico Trotta from Itaú BBA. Please, Mr. Enrico, you have the floor.
Good morning, Ricardo, Carlos. I have two questions. You did mention that the cash generation was slightly impacted by the acquisition of share in different projects. Could you perhaps mention those projects? What projects are you talking about? Can we expect some more acquisition throughout the year?
The second question, since you still have significant results coming from segments two and three, your gross profit should grow. What do you expect going forward, given that the volume in segments two and three, as I said, will grow considerably? That's what I had for you. Thank you.
Okay, Trotta. As for the acquisition of share or interest, that was a specific project. It's a project launched in the first quarter in the city of Rio de Janeiro. Actually, it was launched in the second quarter. It was approved the first quarter last year, but sales only started in April. For this acquisition, we managed to have a very expressive discount rate, which more than justified the acquisition. Had no doubts about it. Even though we have a very strong objective for cash generation, it made sense to tap on that opportunity.
That was really a good opportunity for us to explore. That's why we opted to make the purchase. We do believe we'll be able to deliver a very good level of return on that investment. That's a project which has been approved, has been launched. There is no risk. It is falling under the segment two of the MCMV. Quite safe. We are quite confident in the results we will be able to deliver. As for the Pró-Soluto in the company, we still have a Pró-Soluto volume, which is quite low. Consequently, our default levels are very low. But of course, because the company is growing fast in those segments two and three, it's inevitable that we start having more Pró-Soluto. All our collection and credit policies and our monitoring of those clients have been defined.
It is important to say that our policy includes a very important collection tool. We have direct financing, the so-called Pró-Soluto, until we deliver the unit. So far, the volume has been slightly small. As it becomes larger, we will begin to announce that in our earnings release. But the main thing is to be able to monitor the level of default and make sure that that instrument, that tool, becomes more robust, bringing in guarantors, so that we will be confident in receiving those monies throughout the works. The level we are working with today revolves around 10% of sales. On average, our number is quite below that, I would say about 6% or 7% on average. As I said, that volume is quite low today, and default levels for us is really low. As this volume amounts grows, we will highlight that in our financial statements.
Okay. Carlos, t hank you. Thank you, Ricardo. Have a good day.
Our next question comes from Mr. [Otaka] from Bradesco BBI. Mr. [Victor], you have the floor.
Good morning. I would like you to give us some more color on sales now. I see you have reinforced your sales force. What kind of performance can we expect from this new sales team? How do you see that ramp-up phase, if you will, in terms of new sales personnel? What kind of change do you see happening now in the way the company works, operates, commercially speaking?
Okay. [Luiz], we have implemented quite a change in our sales team. If I could single out an area where we still have lots of gains to capture, I would say it is in sales.
When we start selling units where we get the approval and the credit release at the time of sale, the importance of the sales team really increases. That is why we have our own team. We have seen few other real estate agencies doing that. But we have been growing our team, our own team, and the percentage of their participation in our sales is still growing. We will continue to invest in that front. I think that despite the fact that oftentimes we still have some concerns, our velocity, and so on, but when we isolate MCMV, we saw great differences. We have no problems with sales or MCMV. What we do have are opportunities for growth. But our velocity, I would say, is already at a very healthy level, close to the average of several other companies in the sector.
It is becoming clearer and clearer that that is a trend for the company, to have our own sales force. Another important point to emphasize, we are now adopting a policy which is slightly different from what we used to have. When we are working with the segments two and three units and also the one and a half, if you will, level, you will start seeing Direcional working with real estate units which are slightly smaller. The number of launches will be around 400- 500 units. In this case, it becomes even more interesting to sell through stores and not by building sales stands at each site, which is more expensive. We have already stores in several cities around Brazil, Belo Horizonte, São Paulo, Sorocaba, areas where we have more recurrent launches.
It makes sense for us to have a fixed sales point where we have different products on sale. That's a trend, a tendency which arises from the fact that we are working at a smaller scale than when compared to level one. They're not smaller than the average of the market, but they're smaller than level one. We are talking about a very healthy level in terms of magnitude.
Okay. Also, in terms of geographic regions, can we expect some change going forward?
Luiz. We operate in the areas where we have historically worked. Manaus, Brasília, Rio, São Paulo, and the countryside of São Paulo as well, I'd say 200 km from the capital city. And in this quarter, we launched a project in the city of Fortaleza.
We have a store capacity, which is quite good because that's the city where we had the highest level of range one projects. Our construction prices or costs are quite competitive. And I still see room for us to grow in those cities. And our idea is to dilute our G&A, which reached 13% of our revenues, which is quite high. It makes no sense for us to increase G&A if we have opportunities to grow our launches in those cities where we can reduce those fixed costs.
Okay. Thank you.
Our next question comes from Mr. [Rodrigo Fraga] from Citi. Mr. [Rodrigo], you have the floor.
Good morning. Thank you for the call. I have two questions. First, I'd like to know if you could comment about your land bank. I see you've made acquisitions for the MCMV program. If you could describe in a bit more detail what you expect to have in the coming two years in terms of land bank. Are you still going to continue acquiring more land?
And the second question is about the ramp-up of your operations for the MCMV segments two and three. When do you see that growth translating in more revenues which will give more stability to our top line or to your top line?
Okay, Rodrigo. Our MCMV segment has been growing consistently for the past quarters. I believe we have a very healthy volume of plots of land in the cities where we have been operating for a longer period of time. So we haven't been buying land in those areas, but where we have been for last time, we have started to acquire more land.
I'd say that proportion of 50% swap and 50% cash payment, which you saw happen in the first quarter, has not been our usual procedure. The percentage of swap has been historically higher than that, and our policy is always to try and explore swaps as much as we can. This first quarter was, in a way, atypical, which also impacted our cash generation, because we had to make higher payments than average. But that's not the trend. We're talking about opportunities that came up, but they are not a trend and should not be recurrent moving forward, as they were not in the past.
As for revenue, we are quite excited for two reasons.
First, because clearly in the past two quarters, we see our numbers growing, the REF growing significantly, especially in the segments two and three, has been growing considerably, I'd say to the tune of 2.5x . But more important than that is a revenue coming in with a very good margin. Margins of around 34%- 35% gross margin. When we look at this growth in revenue, we need to separate both segments. For the development, we should be seeing those results emerging in two quarters. The revenue coming from development will grow. When we look at the consolidated numbers, we see a drop this year when compared to last year, because a good component of those revenues is still coming from the level one MCMV. Those numbers will drop by the end of the year. We will have delivered 100% of the project.
A few projects will be recontracted, and they will generate revenue for the coming two years, but that's a very low volume. But looking to 2018, we see the company's revenues resuming levels that we saw, for example, last year, 2016. So we expect the company to grow in consolidated terms. But as for development, we expect growth in the midterm.
But it's important to emphasize, Rodrigo, as a complement today, in this quarter, we've seen something close to 30% of our revenue coming from segments two and three. But when you analyze the REF, we are close to 70% for those segments with higher margins. So it's quite simple to conclude what we can expect in terms of margins for the company and what kind of change we'll see in the breakdown of revenue, where those revenues will be coming from, when those construction works do really start.
Okay. Thank you, Ricardo. Thank you, Carlos.
Our next question comes from Mr. Marcelo Motta from JP Morgan. Mr. Motta, you have the floor.
Good morning. Two questions. If you could comment on that BRL 900 million backlog. I see you are working to adjust the parameters. Is there something new on that front? What can we expect in the short run about that? Also the G&A, you commented throughout the call, is slightly higher than what the company would expect. Of course, revenues suffer from that. So I'd like to understand if throughout this year, we can expect a drop in margins because of this relatively high G&A, or if you can do something in the short term to circumvent that issue.
Let me talk a little about the company's structure. Our G&A, if you analyze that for the past two years, in nominal terms, we saw a drop of around 10%. If we look in real terms, we saw a drop of about 25%. In our segment, unfortunately, despite this drop in revenue, and we continue to adjust G&A for this year, that number should drop even further in the coming quarters. But there is a maximum point, which can be brought down if we aim at relaunching and growing at the same levels we experienced in the past. So in relative terms, it has actually increased. In nominal terms, it continues to go down, and it will continue to go down in the coming quarters.
Our focus now is on increasing the volume of launches and consequently increase the volume of sales, thus speeding up the construction works of those projects which have been sold, which then can become revenue, and then in relative terms, we will be able to dilute that S G&A. Our target is to go back to levels which we had three years ago, two years ago. Our main focus is to actually increase the volume of launches, of sales for a series of projects which are already in our pipeline. You saw our bank land, which grew significantly for the previous periods, which shows the company's capacity and ability to resume considerable levels of launches. As for the REF, those BRL 900 million in projects which had not started, we are working to make those investments viable.
Whenever we have news about it, we will let the market know. We have not come to anything conclusive yet, so those projects are still stopped. They have been so since last year, but we are working to make them feasible, and we will keep the market informed as soon as we have news about it.
Okay, thank you.
Once again, to ask a question, press star one. Please hold while we collect the questions. Our next question comes from Mr. Renan Manda from Santander. You may carry on, sir.
Good morning. Thank you for taking my question. We recently saw that the government is allocating resources from the FGTS for the MCMV program, specifically for that new bracket of 6.5 minimum wages. Do you see any risk of a reduction in funding for level three or even level two? Thank you.
Renan, let me try to understand your question. Your question is if, in order to meet the demand for the extended level three, we could perhaps see a drop in the funding for our normal, not extended, levels two and three. Is that it?
No. Because of the pró-cotista, as the government calls it. There had been a suspension in those launches, so now part of those funds for that new level tier was allocated to that new level. So that's my question, if there is a risk, should that new program be implemented really, we will need a new reallocation of funds and which would thus affect level three or even level two.
One of the main cares we need to take when we talk about MCMV is, of course, the availability of funding. The FGTS, the government severance pay fund, remains at a healthy level despite those withdrawals of up to BRL 40 billion. That's a fund with a very high liquidity level. That's something we need to be cautious about.
We need to monitor that very closely because I'd say that after, how can I put it? After that risk that we saw before, a risk of having higher interest rates, now we have an issue with the level of liquidity in the fund. Because when the fund started to distribute 50% of interest for the quota holders, their compensation increased. So the main concern we have as a company with a focus on MCMV is on the liquidity of the funds. We are concerned. We do not know how much longer the fund can continue to allocate funds for programs outside of the program.
The pró-cotista program shows that there is a big concern for that too. But the fund has not been executing the investments contemplated for infrastructure and mobility and so on. This first shifting that was made to meet pró-cotista demands is coming from the infrastructure area, from which BRL 5 billion were removed, but had no impact on the housing projects. But we know there is not much room left. But we do not expect any news on that front. We don't expect that severance pay fund to be used for other areas which have not been approved by the government. We also do not expect to see more withdrawals. We see the fund, even though it's healthy, coming to a limit. And I do not see an impact on levels two and three in the short term.
But it is impossible for us to be sure about that. So what I'm saying here is more an opinion that I have, but there is no certainty whatsoever. I think a positive measurement or a positive measure which was announced was the reduction in the ceiling price for the units for which those resources can be used, those fundings can be used. That ceiling was brought down to BRL 500,000. So naturally, that will restrict the use of those funds for the pró-cotista funds. Now, they will have a higher longevity than they had in the beginning of the year. But it's quite clear for us that there is a limit to those funds, and we are paying close attention to that.
Okay. Thank you.
Once again, to ask a question, please press star one. Thank you. This concludes the Q&A session. I'd like to turn the floor back over to Mr. Ribeiro for his final remarks.
We have closed another quarter where we have made it clear that there was a change in the company's strategy to adjust to the market reality. That change started first with an increase in land acquisition, that's into the segments two and three of MCMV, and then there was an increase in launches and sales. And now we see even clearer, a shift or a change in our revenues. The operation in those segments has proved to be quite adjusted with gross margins, which are quite healthy at 35%. In other words, we are very close to the market average or even above that level.
I do believe that one of the main competitive advantages that Direcional has is our flexibility to migrate between the several segments in the market, from income, from middle, average income, levels two, three, level one. This diversity of operation might eventually hurt our results when we are going through transitions. On the other hand, that flexibility, we guarantee the company's longevity.
So I'd say we're now going through a transition moment, but I see that with very good eyes. We see that as a great advantage that we have, and we do hope we are only going through a transition, and we expect to deliver healthy, good results very soon, just as we have in the past throughout the several of years of the company in the market, over 30 years. Once again, thank you all for participating. Thank you for the questions, and we remain available for doubts, clarifications, whatever you need. Thank you again. Have a nice day.
Okay. Thank you. This concludes today's Direcional's first quarter 2017 earnings conference call. You may now disconnect your line.