Good morning, and thank you for standing by. Welcome to the conference call of Direcional to release the results of the third quarter of 2016, and for the first nine months of 2016. Today with us, we have Mr. Ricardo Ribeiro Valadares Gontijo, Vice President, and Fernando José Manço Ramos, CFO and DRI. This conference call is exclusive for analysts and investors and is being recorded, and all participants will be in listen-only mode during the company's presentation. Next, we are going to start a questions and answer session when further instructions will be provided. Should any of you need any assistance during this conference call, please request the help of an operator by pressing star zero. This conference call is being simultaneously transmitted on the internet through webcast, and it can be accessed at www.direcional.com.br/ri, where you may find the slide deck.
The selection of the slides can be controlled by you. A replay of this conference call will be available right after its end. Before proceeding, I would like to clarify that statements made during this conference call relative to Direcional's business prospects, operation and financial projections and goals are beliefs and assumptions of the company's management, and they are based on information currently available. Forward-looking statements are not guarantee of performance. Investors should understand that economic conditions, industry conditions, and other operational factors may affect the future performance of Direcional and may lead to results that will be materially different from those expressed in such forward-looking statements. Now, I would like to turn the conference over to Mr. Ricardo Ribeiro, who is going to start the presentation. Please, Mr. Ricardo, you may start.
Good morning. I would like to thank you for your participation in another conference call of Direcional. I would like to start the presentation on slide number three, talking about the evolution of our operations in segments two and three of My Home, My Life , the MCMV. We have bought, in the last 12 months, plots of land meant for these two segments, two and three, worth more than BRL 2 billion. When we see launches, you can see the volume of launches has grown expressively. Over the past 12 months that ended in September 2016, launches had a growth of 193% as compared to the 12 months before that ended in September 2015. Only for the segment of MCMV, we had BRL 397 million. Now, on the chart on the right-hand side of the slide, talking about sales.
Sales also had a significant growth when we compare the 12 months ended in September, a growth of 47% as compared to 12 months that ended in September 2015. Again, in the segment MCMV, in spite of the quite significant impact of the strike in September, sales amounted to BRL 176. This is a significant growth even though it is much smaller than we would like to be selling. Moving to page four, talking about launches, specifically for the quarter and first nine months of this year. In the third quarter, with a growth of 337%, one of these launches, this was in segment two of MCMV, another launch meant for average standard or middle standard in the city of São Paulo is within a line that is very interesting for buyers, where they can use a severance payment to pay the property.
And we also have another launch in a subsequent phase of an undertaking that had already been launched before. When we take the first nine months of this year, we had a growth of 97% in the company's launches as compared to the first nine months of the year before, reaching BRL 452 million in potential of sales after launches. If we consider only the launches of MCMV, launches were slightly bigger, getting to 131%, and in the first nine months of this year, we launched BRL 291 million. In 2016, it accounted for 64% of total launches of Direcional. Now moving on the next page and talking about our sales. In the third quarter of this year, Direcional net sales have had a growth of 43% as compared to net sales in the second quarter, and we got to a total volume of BRL 94 million.
In the first nine months of this year, the growth of net sales was 16%, and most of that growth came from the quarters more towards the end of the year. When we consider MCMV alone, a growth of 30% in the first nine months of this year compared to the first nine months of last year. MCMV represented 47% of the company's net sales, and when we get our inventory available for sale, the MCMV represents only 30%. So the sales that we have had is better than mid and large standard. It's also important to highlight that the North region represented, the first nine months of this year, 26% of sales, and we take only the third quarter, and this is information that is not there. They accounted for 46% of total volume sold.
When we take the inventory of the North region, we can see that inventory there is only 20% of Direcional's current inventory, 46% of sales and 20% of inventory. Thereby demonstrating that we have been able to reduce significantly our inventory in a region where market conditions are slightly more challenging. Of course, this has represented some loss in margin, but we have been able to reduce inventory at the expense of margin. But we are, in that manner, trying to avoid a more serious problem to the company. Now on page six, I would like to highlight is the fact that we have been having a reduction, so we had 345 units with a drop of 24%, as compared to the number of units in the second half of the year. We resold the units that were canceled 41% within the quarter.
As it is natural to expect, most of the cancellations have been taking place in projects that were launched before 2014 that are in the delivery phase, and this is when some of the customers have credit denied to pay the installment of the loan for properties that were sold one, two, or three years ago. On the slide on page seven, talking about the speed of sales via VSO was. I would like to mention part of this speed of sales. Part of the launches this quarter in a subsequent phase, a product that had already been launched in Belo Horizonte. Naturally, a product that had been launched before, this was not equivalent to previous numbers. Another product that was launched in São Paulo for mid-standard products, and we want to make the transfers right at the plant in the beginning.
We sold 12% of our units within the month with a satisfactory speed within the quarter. For MCMV products that were launched in the second quarter, especially in June, these products where we expected to have a sales velocity that was very expressive in the second quarter. We found some difficulties, especially in the analysis and approval of some of our customers that directly affected the velocity of sales along the quarter. This difficulty has already been solved, and we believe that we are going to have a sales velocity that will be quite superior in Q4 because we have already solved the problems that we came across in the third quarter. Moving to slide number 8 about inventory in the third quarter.
We closed it with BRL 1 billion and 200 million approximately in terms of units available for sale, and 30% of those are meant for MCMV segments two and three. It's important to highlight that of the inventory available for sale, 34% was launched in 2016, meaning that this is a newer, healthier inventory. 2016 has been a year where we have increased our launches significantly after a gap of launches that we had unfortunately in 2015 because we didn't have any contracts in MCMV segment one, which was quite significant for our company in 2014. Also because in 2015, we went through a quite complex situation in mid and high standard homes or properties that is affecting the volume. It's not as we would like it to be.
In fact, 2015 and especially the beginning of 2016, those were phases of transition, where we had to focus very much on segments two and three for MCMV, especially in buying plots of land and approving projects. In our vision, we are getting to the third and fourth quarters of this quarter at cruise speed. We had a gap of a year and a half with volume that was well below our potential and led to a drop in revenue as you've been seeing in the most recent quarters and was clearer in the third quarter and is bound to continue for some time until all the properties that have been launched recently are sold, and then we can have a higher volume of revenue in terms of the sale of real estate.
Now we have managed to reduce along the first nine months of the year, the finished inventory by 5%. So we started the year with 899 units available for sale, and we closed the quarter with 858. This took place even though the volume of delivery, especially medium standard, where we have a slightly higher volume of finished units. But we delivered quite significant volume in medium standard. Just to give you an idea, in terms of finished units, we had the VSO, rather PSV, so it's concentrated almost 100% in medium and high standard. Moving to the next page, talking about Direcional's land bank, focusing on segments two and three of MCMV. From January to September this year, we bought 15 plots of land meant for MCMV two and three.
The average cost of acquisition was 12.5% of the PSV. 83% of the land were bought through swaps, especially financial. We closed September with a land bank total for Direcional of BRL 10.5 million, and BRL 4.8 billion were meant for MCMV. Here we are talking about the percentage of Direcional and the property of these areas. The land bank is 60% concentrated in the southeast region of the country, even though we had a VSO that was quite uniform all over Brazil. No region had a VSO that was much superior to the averages, kind of constant all over the country. On page 11, this is a very important page, where I would like to give you an update in terms of what has been going on. Last year, just last year, we hired the first projects of Direcional in the program, MCMV.
One was in Itaboraí. This will be a very significant company. This has been a pioneering and very fast project, and we hope that in this segment we will have a speed that is slightly smaller than segment two because we are on a tight schedule. We hope that the speed is quite superior. We would like to offset the return on capital to compensate, and this is certainly going to be compensated by higher VSO in a segment that is much stronger than segments two and three. This is something that we are monitoring closely to define what will be our operation in this quarter and in upcoming quarters. I would also like to give you an update on the launches in segments two and three along the fourth quarter.
We have already launched three projects that are part of MCMV with PSV of BRL 110 million. We are with two other projects in the final phase of contracting with BRL 121 PSV. Q4 has approximately BRL 230 million of project that is already launched. This quarter is quite important for us. I would also like to highlight some other important information that are a summary of some segments of two different segments, where we operate in the area, in Direcional's area of incorporation, MCMV and medium standard. We have launched this year in MCMV, 64% of our product. We sold 47% of our sales, 47% are part of MCMV, correcting myself. However, as MCMV projects are at the very initial phase of construction, and so of all launches and sales, the revenue that has been booked coming from MCMV is only 16%.
Meaning revenue was still not very representative of the overall revenue coming from the segment of real estate incorporation. 84% came from medium and high standard properties and commercial. I would like to highlight that the gross margin that we have been booking over the first nine months of this year in MCMV is 32%, whereas the adjusted gross margin in medium standard is 11%. Meaning we have 16% of our revenues where we have a gross margin of 32% and 84% of our revenue with a gross margin of 11%. Of our sales, 47% will have this margin of 32%. Of course, as constructions complete, and this will take place along the first half of this year.
You will very clearly see a change that will be significant in the gross margin that will be booked by Direcional in terms of real estate incorporation. This is very important, a significant change that we are conducting. This will be very important and we will be delivering over the next few months. I would like to turn the conference over to Fernando, who is going to share some of our financial information with you.
Thank you very much, Ricardo, and good morning to everyone. We are now moving to Direcional's financial results. On slide 13, we will talk about the consolidated gross revenue that closed at BRL 337 million. This represents a drop of 18% as compared to the previous quarter. In the first nine months of the year, the gross revenue is 4% below the result in the same period last year. To understand these variations, we need to consider all the businesses of services and incorporation separately. In the case of services, the gross revenue of the third quarter was BRL 207 million.
The drop of 9% as compared to the previous quarter is a result of the increase in the pace of deliveries and the fact that some major construction works are getting close to their final phase of construction. The gross revenue of incorporation, on the other hand, closed the quarter at BRL 130 million. It should be highlighted that if the sale of units through the sales of quotas and assets in terms of inventory units and land in the segment of medium-high or upper-medium and high, the gross revenue in the segment of incorporation would have reached BRL 272 million in the quarter and BRL 536 million in year-to-date numbers. As a consequence, the segment of incorporation accounted for 43% of the consolidated gross revenue appropriated in the first nine months of the year, in contrast with 36% in the same period of 2015.
The trend is for the incorporation segment to continue having participation in the gross revenue of Direcional because of the strategic directions that the company has been adopting, focusing on MCMV Segments two and three. The gross margin adjusted by interest and operation of quota has closed this quarter 15.2%, and year-to-date numbers at 20.9%. As to the previous periods, both segments have presented a drop in margin. In the case of services, the reduction in the gross margin associated especially to the completion of some works that were having an average above historical margins. In terms of incorporation, the drop in gross margin was sharper. In this manner, we understand that it is important to break down numbers so that you may understand better what effectively happened and how it impacted the result of the quarter.
Once we assess a group of projects of work starting in 2016, MCMV two and three, we see that the gross margin is a very healthy level at the range of 32% in the first nine months of the year. However, this group of projects accounted only 16% of the gross revenue that was booked in a segment of incorporation, and most of those ventures are still in their initial phase of construction. In this manner, it is clear that the drop observed in gross margin associated especially to projects in the MAC segment and the profitability of that segment suffered the impact of cancellations for the following reasons. First, the percentage of units that were resold dropped to 46% in the third quarter below the level that we saw in previous periods.
It is worth remembering that immediate resales help to mitigate the accounting effect of cancellations in the quarter. Secondly, the increase in the representative in terms of canceled sales as compared to the gross revenue of incorporation. This line is part of revenue deductions and is related to financial funds returned to customers upon cancellation. Most of the units canceled is focusing on the southeast region, and these projects have higher margins. On the other hand, most of the sales of inventory in the quarter took place in the north region, where projects naturally have lower margins because of the higher level of discount. In order to quantify the impact of cancellations in the adjusted margin for the third quarter, we conducted some exercises. In our analysis, in Q3, cancellations were responsible for reducing the consolidated adjusted margin of Direcional as compared to the results that were presented.
Meaning that taking out the cancellations, the consolidated adjusted margin would have been superior to that of the third quarter. It is important to highlight that we believe that the gross margin of Direcional will recover as the projects in MCMV two and three projects gain share in the overall consolidated margin. Now, we are going to talk about admin and financial expenses. They totaled BRL 26 million with a growth that was small, well below the inflation rate of the period. Commercial expenses, on the other hand, totaled BRL 13 million in the period with a drop of 3% as compared to the previous quarter. In spite of the increase in gross sales, the volume of sales of launches in the third quarter has had a small drop in the slide.
In this manner, Direcional's net income is BRL 53 million in the first nine months of the year. Now, on page 15, in the third quarter, Direcional has had a cash burn of BRL 53 million, and this was influenced by a drop of 36% in the volume of transfers because of the impact of the strike index ahead on the financing of new customers. In spite of the cash burn, we still have a solid capital structure. You can see on slide 16, the indicator net debt over equity closed the quarter at 18.6% with a level of leverage that is very healthy. It is worth remembering that increase as compared to the previous quarter was also influenced by the payment of dividends amounting to BRL 40 million that took place in June.
Today, 69% of our net debt comprises construction financing projects that will be amortized once we sell when our customers hire their real estate loans from financial institutions. If we take aside those operations, we would have a net cash of BRL 286 million, as you can see in the lower left-hand side. Now, I would like to turn over to the Q&A session.
Thank you. We are now going to start our questions- and- answer session for analysts and investors only. If you want to ask a question, please press star one on your touch phone. If at any moment your question is answered, press star two to take your question from the list. Questions will be answered as they are received. Journalists, please get in contact with our press relation services with Ms. Renata Mattos at the telephone 3134315442 or at the email renata.mattos@direcional.com.br. Please wait while we collect questions. Our first question comes from Mr. Luis from Credit Suisse. Please
Good morning, everyone. I would like to make a comment about the launches in the fourth quarter. About the evolution of sales, if the company is getting at a higher speed in Q4, and your prospects for next year, and the pace of launches. The second question, are you thinking of going back to contracts in MCMV one? I would like to know about your backlog. Are you already talking about this in terms of adjusting your prices?
Okay. Luis, I would like to apologize if I am not able to answer all your questions, especially with regards to projections. We have filed an offer at the CVM, so we are sort of limited in terms of what we can disclose to you. We will not be talking about the outlook right now, but considering this offer that we have so that we have no delays in the schedule that we have put together. In terms of sales, October has been a month that has proven to be better than the third quarter. The third quarter was very difficult, very complicated. September, we had strikes, and this made our lives way more difficult. There were two projects that we launched in the second quarter. I can say that we started the second quarter, and things were more in order.
In terms of launches, we have BRL 230 million out in the streets. I cannot talk about the adjustments that we think that we should make, and we will see. As to the backlog, you mean the backlog of BRL 900 million with MCMV one, whose works we have not started yet. Yes, we have been talking about it, and effectively. I would just like to talk more about it once we have some contract authorized to start. In terms of our expectations, we do have a backlog. We are not expecting to have any projects canceled. The government does want to continue and to hire everything, and we really want that to continue.
Thank you. A follow-up in terms of MCMV one, the reported margin for the quarter has dropped, and it is kind of stable in terms of the unit.
The main projects that we have been completing, it was natural to have a change in backlog as projects evolve. We have had some problems with some works that have been delivered or in the final phase of delivery in terms of invasions. We had to change 200 doors in one construction. We have to spend in security so that there are no invasions, and that is expensive. These costs were. We had not budgeted for those costs, and we did not expect, we were not counting on them, but we had some problems in some specific works, and we had to adjust to account for unexpected costs, especially those related to invasions that we were not expecting, and they kind of hurt our bottom line.
Thank you very much. Our next question comes from Mr. Alex Ferraz from Itaú BBA. Please, mister, you may start. Thank you for the presentation. Considering the gross margin to appropriate.
So I would like to understand if closer to the quarter, do you already expect a strong recovery of gross margin, as you mentioned? But I believe you will still be selling quite intensely with smaller margin. How do you see gross margin in the last quarter? As you have broken down during the presentation about the BRL 230 million that you have already launched, I want to understand how you are expecting to close the quarter, BRL 230 million to get close to BRL 300 million. How do you understand this in terms of launching?
Okay, Alex . I am going to apologize. We are in the middle of the quarter. It is evolving very well. We have BRL 230 million in terms of launches. It only ends on December 31st. We are working intensely, and we will see what we can do. As to the gross margin. In the medium standard, we have been having Even though we believe that it is going to improve, it has been deteriorating month on month. Considering that these medium standard works, most of them is already complete or in the final phase of construction. Once we manage to sell them, they have a strong impact in revenue, even though for MCMV, they are initial phase of construction, even though the booking of revenue is very, very low.
We cannot yet have a mix of revenue arising from segment two that is not very representative. Obviously, the result of Q4 will depend on how much we sell on one segment on the other. We are very strong in the medium standard with the aim of bringing in cash, and this objective persists. But while that does not happen, we are not going to have a significant change in terms of cash. The margin. For the time being, we are going to focus more on cash and not so much on margin. The margins might still be kind of low for the time being. But we believe that, unfortunately, we are going to have more sales in the segment where margins are smaller, at least for the time being.
Our next question comes from Mr. Guilherme Chiafarelli from Citibank. Please, Mr. Chiafarelli.
Good morning. My question is about cash generation. Do you expect to reverse this cash burn that was very much impacted by the bank strike in Q3? Are you expecting to change its level in 2017, especially in terms of MCMV? Are you making any changes? Thank you.
Guilherme , I am going to try to answer your question as much as I can, because in Q4, it is a quarter when we have some more expenses. Of course, we are working intensely, but I cannot tell you what we expect in terms of effective generation. As to MCMV two and three, I am going to share with you what is in our balance sheet, our expectations, but I am going to simplify your lives. One important piece of information is the following. If you analyze the information in our release and the webcast in terms of funds, in terms of transfers of My Home, My Life , it was BRL 37 million. You will see, our operation in My Home, My Life is okay. We have no problem whatsoever in Minha Casa, Minha Vida. It went down this quarter in spite of the strike.
The strike impacted new contracts. Considering that MCMV goes on as we execute the construction, the impact was just on new contracts that did not happen in September, so the impact is less significant and accounts receivable went down. Even though works is at the very initial phase, we can see that the operation is going very well. We really need to focus on medium standards in terms of sales, transfer, in order to reduce accounts receivable in the medium segment. MCMV is doing very well, and this is where we are focusing our operations. This is where we want to make it more relevant. It is important for you to take the conclusions from what I have said and in terms make your own projections for the future.
Thank you. Our next question comes from Mrs. [Scapia] from Bradesco.
Good morning, everyone. Thank you for the opportunity. In the latter message from administration, you say that there has been a change in the credit analysis that is more restrictive now, and this has somehow had an impact on your bottom line. Do you see any possibility of hiring or contracting the same MCMV project by two banks in order to try to mitigate the impact of stricter credit policies?
In a period of construction from launch until completion of construction, we need to work with either with Caixa Econômica Federal or Banco do Brasil S.A., and we have just one plot of land to serve as guarantee for that corporation that funds the construction. We need to choose one bank or the other. After completion of the work, and we have the permits, another customer may choose where they are going to get a loan to buy the house. It may be either Caixa Econômica Federal or Banco do Brasil S.A. Complete work, finished units, they have an option, and while still in construction, we need to choose one or the other. We might migrate from one to the other, but we cannot use both at the same time.
Could you maybe separate development from construction to try to mitigate?
No. If it is just one lot, we cannot. What we may do, if there are two lots, we may work with one institution or one organization for each one of the lots. Usually, we work with just one lot for one project.
Thank you. Our next question comes from Mr. Renan Manda from Santander. Please, mister.
Good morning, everyone. You have mentioned that there are two projects. Is there any impact on the sales of units already sold in past quarters? Any reversal? Do you have any other projects in the process of migration? Performance.
Well, actually, we are not allowed to have any sales. If we have sales contracted for two, it cannot switch to 1.5. It is either one or the other. We have a project with 11 residential blocks, and then we changed. Depending on the development. One block is 1.5, and the other block is two, but we cannot go back and forth, except for customers above BRL 2,350 . They can buy properties. For customers below BRL 2,350, of course, they will be in the blocks funded at 1.5, but it is above that, it will be for two. We do not have a single block with units being sold at 1.5 and two. This is not allowed. These are for projects meant for segment two that were then reallocated 1.5. Our prices are below our cap price, and that is our strategy. Thank you very much.
Our next question comes from Mr. Marcelo Motta from JP Morgan.
Good morning, everyone. I have two questions. Just going back to gross margin, and during the presentation, Fernando mentioned that you had seven points of impact just in terms of cancellations. There are no discount with an impact in the gross margin. Can we see a higher level of discount next quarters impacting the gross margin too, considering that your inventory is at BRL 200 million? The second question is regarding sales. Is this a strategy that the company will follow over the next quarters so that we know what to expect in future quarters along those lines?
Motta, good morning. As to your first question about the gross margin, it is important to say that the main impact was because of cancellations. Of course, the discount somehow impacted the gross margin, especially in the north region, as Ricardo said in his explanation, when the dynamic of the market is allowing discount levels well above what we have been doing in other regions. So the impact in the gross margin in the Q3 comes from cancellations. As to higher discounts or lower discounts, well, to avoid talking about the future, but I believe that we have been having a sales velocity in products that are important, especially in the north region, that is satisfactory this quarter. So 46% of our sales is in that region with only 20% of our inventory.
So I believe that the levels that we have been working with currently are levels that have been driving a VSO that is appropriate. So considering that we need to sell, so our velocity is within what we expected for those projects. As the sale of FDE, I am sorry. This is a non-recurring event. It is not our focus. It took place this quarter, but it is non-recurring. But it is not something that is part of our operation or something that you have been seeing in previous quarters. This is a non-recurring event this quarter. Just to complementing the rationale of the operation was to reduce our exposure to middle-income segments in the north region.
Our next question comes from Ms. Gabriela Benjamin.
Good morning. It is about the share of cash payments. What has driven that, and what is the outlook for the future?
Just a minute. Gabriela, I am sorry for taking long. I wanted to see what we did this quarter. But one of the plots was in Guarulhos. The only way was for us to buy cash. Guarulhos is an area where we need to increase our exposure. It is in the region of São Paulo, priority for Direcional today. So we bought at quite interesting terms, and as the plot of land was paid cash, the percentage of our PSV has a lower cost, but it is a project that we really believe in, and we are quite sure about its liquidity. The other was a swap in Fortaleza and was another area in Manaus, adjacent to the swap. So the sale of FTE quotas and FDE quotas, and we swapped it. We sold our quotas, and we bought a plot of land.
The same person who owned our FDE quotas. So in the negotiation, when we were somehow selling them a medium standard, we said that they would buy a low-income kind of land, which is adjacent to another development that we already have, and we already conducted all infrastructure work. It really made sense for us to buy that area, but it's a non-recurring event this quarter. The results of the quarter are not related to any change in strategy of the company in terms of our purchasing plots of land. We are still favoring the swap for the MCMV segment. Thank you very much.
As a reminder, if you want to ask a question, please press star one. If you want to take your question from the list, please press star two. Please stand by while we poll for questions. As a reminder, if you want to ask a question, please press star one. If you want to take your question from the list, please press star two. Thank you. The Q&A session has now ended. I would like to turn the conference over to Mr. Ricardo Ribeiro for his final considerations.
I would like to make a very brief summary of everything that has been said along this conference call, and I believe it was very clarifying in terms of the different segments and margins and everything. We are closing the third quarter, delivering results that we are not happy with a return that is well below the cost of capital. Our operation in the medium standard segment has been heavily impacted, and we have hired works with very high margins and sold at very compressed margins, thereby hurting very much our bottom line, especially because they took place because of this difference in margins. Even though cancellations are going down, they still have had a significant impact in our numbers.
MCMV and the projects are still in the beginning, so our booking of revenue is very low, which does not allow us to increase the consolidated margin because the total percentage of our revenue is still not really significant. This is an operation that is very healthy, as you can see. Everything we've been doing is in that segment. We are still very optimistic in that segment, even though we are not yet delivering the results. Our results now are the result of projects that were launched two, three years ago. In terms of our launches, we are focusing very much in healthier segments in order to really have a quite significant impact of this segment where we have results that justify the investment of our equity in projects, and that will indeed provide more value to our shareholders.
Once that is very clear, it demonstrates what the company is doing is what needs to be done, even though our cycle is very long and oftentimes our operations does not have any immediate impact in our numbers. I would like to close the call, the conference call with those numbers, and to thank you once again for your participation. Thank you very much.
Thank you. The conference call for the earnings release of 2016 and the first nine months of 201 of Direcional has now ended. Please disconnect your lines now. Thank you, and have a good day.