Good morning, and welcome to Tenda's earnings release call for the first quarter of 2020. In today's conference call, we have Rodrigo Osmo, CEO, and Renan Sanches, CFO and Investor Relations Officer. We would like to inform that this presentation is being recorded, and that all participants will be placed in a listen-only mode during the presentation. Afterwards, we will hold a question and answer session. If you require assistance, please press star zero. Before beginning, we'd like to inform that this conference call will address Tenda's financial results for the first quarter of 2020. It is based on information currently available. Management statements involve risks, uncertainties, and may make reference to future events. Any change in macroeconomic policy or in legislation and operating results may affect the company's performance. Mr. Sanches, please proceed.
Good morning, everyone, and thank you for participating in the teleconference of earnings release of Tenda. Let's start with some remarks about the results of Q1 2020 and the consequences of COVID-19 in our businesses. Then we'll open for questions. In Q1 2020, Tenda faced operational and financial obstacles that resulted in net income of BRL 17.5 million, a 64% drop year-over-year, and 76% drop when compared to Q4 of 2019. The increase in cancellations due to the backlogs and transfers last year, and also an increase in default because of COVID-19, resulted in a net revenue of BRL 415 million, a growth just of 1.6% year-over-year, and an adjusted growth margin of 31.8%, 4 percentage points below the first quarter of 2019. There are two other factors that explain the drop in profit in the quarter.
First, some marketing initiatives that have allowed online sales channels in large scale, elevated expenses in sales of 2.9% in gross sales in comparison to 7.4% in the first quarter of 2019, and a reduction in the position of net cash and Selic reduction led to a financial result in a negative position of BRL 3 million. Tenda consumed BRL 68.2 million of cash in the first quarter, mainly due to the intermittency of mortgage transfers in the first month of the year due to a deadlock and in the allocation of resources for Minha Casa, Minha Vida program, which has already been resolved. COVID-19 has brought new challenges in transfer for the upcoming months.
Since the end of February, when the first case of COVID-19 was confirmed in Brazil, Tenda has structured itself to understand the new context and act in order to preserve the integrity of its employees and customers and the financial strength of the company. At the moment, the scenario for the upcoming months remains uncertain. Social isolation leads to slowdown in approvals of projects in notaries and in municipal and state agencies, which may jeopardize the company's volume of launches for the year.
Although gross sales have not been significantly impacted so far with the closing of stores due to combination of resilient demand and our readiness to serve customers online, the slowdown in launches can reduce inventories and impact in future sales. Another point of uncertainty is that the construction works, most of them are ongoing.
But we have been very stringent with safety protocols, which has increased our absenteeism. New decrees and voluntary interruptions may impact the productivity of the construction work. Finally, despite the operational bottlenecks adapting to the current times, CEF has worked to keep maintaining the transfers, hiring new enterprises and measurements. The consequences of the pandemic are not yet clear. On one hand, a renewed perception about owning a property and the government's emphasis on housing program are favorable for Tenda.
On the other hand, a continuing crisis may result in structural unemployment, with impact on FGTS demand and liquidity. Amid such an uncertainty, the company took several initiatives to come out stronger from this period. First, we got financing of BRL 300 million with banks in March and April, increasing gross cash by almost 30%.
In addition, Tenda has restarted to take project financing lines with CEF after reducing this balance since the second quarter of 2019. We are also negotiating with suppliers and landowners and got access to all government incentive packages such as tax postponement. We also strengthen our partnerships with customers to improve confidence and reinforce trust. Initiatives include renegotiation of outstanding installments and accelerating delivery to buyers, among others.
We also adopted measures regulated by Medida Provisória 936, which allows reduction of working hours and wages, but taking care to preserve the net remuneration of employees impacted by the measure. Finally, there was a voluntary reduction in salary by 25% for officers and 40% for CEO and board members for an indefinite period of time. Tenda is committed to go through this period of uncertainty caused by COVID-19, providing safety for shareholders, customers, and employees, and consolidating itself as the main company focused on affordable housing in Brazil. This concludes my comments, and we will take questions now.
Thank you. We will now start the Q&A session. If you want to ask a question, please type star one. We kindly ask you to please ask your question not in the speaker mode so that we can have better audio quality. Please wait while we are collecting the questions. Our first question is from Victor Tapia from Bradesco BBI.
Good morning, Renan. First point that I would like to discuss with you. You have mentioned that sales did not suffer a significant impact because of the demand for this product in addition to the online sales. In this industry, usually people say it is very difficult to sell an apartment 100% online, and apparently this perception is changing because the current situation has accelerated this process. In addition to that, what else has been a driver that will have on online sales? We saw some sales of medium to high income players who have not had the same performance online.
Could you tell us a kind of a sense of magnitude in terms of quantitative level of what kind of impact has happened in sales? On off-site construction, you said you already have land for the first prototype. Could you please expand on the expectations of the company when you are still analyzing the feasibility of this project in the feasibility study phase? What kind of gains could you have in terms of gross margin, construction timeframe, other benefits this project could get?
Hello. Thank you for your call and for your question. It's the first time that we have a conference call from home, so we are also testing the technology. As you could see in the earnings release, the demand has changed. We needed to accelerate our online sales platform implementation, and we needed to do this overnight. There were several pilot projects that we had been conducting, but all of a sudden, these had to be implemented immediately. So we had to make more investments and quickly so that we could keep operating under this scenario. An assessment that we make is that in online sales, keeping this physical contact is difficult, right? That has an impact on the trust that especially low-income customers have because they need to make sure that they are investing their money, which is so scarce, in a business that they trust.
On the other hand, we have also seen reduction in friction. The low-income customer is ashamed to take a no, to go to the store and maybe receiving a no, maybe getting denied the purchase of that property. Since now the process is totally online, just after a few hours, they get an answer whether they can purchase that or not. This causes fewer restrictions, and we have witnessed this benefit as well. It's not that the online environment has made things more difficult. We've also seen benefits. There were concerns that people had, as I mentioned, in the beginning of the COVID-19 crisis. We were uncertain about the sales performance and how they would be at this time. But there is a positive combination of factors that have led to satisfactory results. This is something new to everyone.
We need to follow up this process longer to see whether the April sales that naturally have not been completed yet, whether they will have the same percentage of cancellations. Usually it accounts for 10% in cancellation. So let's see whether this is also true for online sales. We are taking care, but of course, this is a scenario of uncertainty even for the clients. So we need to wait a little bit longer to see whether this channel is efficient. In March, we invested a lot in marketing and to allow us to go through these times. So we need time. We need time to understand the level of marketing and sales expenses for this model. This, of course, is not reflected on the results of the first quarter.
Probably those expenses in the next quarter will be lower, but we need to run this project for a longer period of time to get better visibility. In magnitude of sales, it was very similar to the second half of 2019. We were concerned with the risk of reduction in inventory of the company. On one hand, the fact that we had good sales in April allows us to expedite our sales as much as possible as we do if we didn't have COVID-19. But the speed of approval of projects is slow. If we have a reduction in the number of launches, this will impact the volume of sales too, because the sales turnover is very fast. The good news is that in the fourth quarter, we had a very robust launch level above BRL 400 million. So now we will have significant inventory for sale.
But we need to expedite launches soon. Otherwise, even though we have good inventory, they will be eventually reduced. So launches are very important to us to determine how the volume of sales can behave in the future. As to the site, we have run several tests in the warehouse area that we have purchased. We have purchased also different types of land for this particular product. We are still assessing which are the technologies to be used for this piece of land, for this warehouse, that we rented. There is some machinery there, but we are in the early stages. We still need to test several hypotheses, and this is what we've been focusing on lately. Having said that, as we had mentioned before, we will probably not have any financial result of that in the next 2 years.
Even if it's a successful project and we decide to move it forward. Just the time that it takes to test a pilot project and gain in scale will not show any benefits in the P&L in the next two years. But the capital turnover model versus margin, since we are working in low-income brackets of the population, even in this new market, possibly it will have similar setups to what we do today. But of course, we still need to test those models, but it will be probably similar. The major benefit that off-site will bring is an increase in the market when compared to what we have today, since we have restrictions in only operating in the industrialized model.
We can only operate in large metropolitan areas. We have practically reached everywhere we can, but we cannot grow any further in those regions so much. So we can see the end of this line in a few years. And the off-site will practically double this addressable market, and we can expand from then. The benefit is not about changes in the financial results, but more in the sense of the size that the company can achieve in the long run.
Thank you. I'll just like to ask a follow-up question on the off-site. So in terms of net revenue, you will have some time, but in terms of CapEx, what do you expect to spend in CapEx so that we understand our models here?
We will not communicate this information right now because there are several options. We need to determine the model for this investment. We need to determine whether we'll make partnerships, whether we'll buy plants. There are different possible models. So at this point, we cannot tell you how big or for how long we're going to have those CapEx investments. It will be relevant, but I don't think that we will move away from our leverage guide about 10% of our net equity. We need to have a very sound and robust company, financially speaking.
Thank you.
Our next question is from Alex Ferraz from Itaú BBA.
Good morning, and thank you for your presentation. I have two questions. The first regards provision. I think that it's very clear, the provision for cancellations and default after the apartments are delivered. But thinking about default and its provision, we can imagine that lockdown and the whole COVID-19 crisis will have an impact on that, and probably this provision on default will have to increase, which will put pressure on the margins in the upcoming quarters.
And as a second note, as you mentioned, if you could get the approvals with the notaries and the local government, would you be comfortable launching new projects, even in a scenario of lockdown, of restriction? Do you think that you could have a significant volume of sales in these launches if you got those approvals from municipal governments?
Thank you for your question. Regarding provisions in March, we were able to get the first impact of March in the provision for doubtful payers, PDD. First, the provisioning model is very prospective. We have been careful in the last three years to get a very stable provisioning model so that we could already predict future defaults and check not only those who are defaulting today, but also those we expect to be so in the future. 75% of our investments will be due in the last half of the month.
Based on the previous behaviors, we could see that their payment ability has changed, and March is just the beginning. Probably those who default in March had not lost their jobs yet, so we are making provisions because of that. Now comparing April and March, April had a lower performance when compared to March.
Renegotiation campaigns that we have proposed to customers have been very good. We were able to contain default levels that otherwise would have been much higher because we were able to renegotiate those contracts proactively. But still there was a drop. If the crisis gets worse, we will expect new changes in the levels of provision for PDD. In terms of launches, regarding this scenario of lockdown and whether we would make new launches if we got the licenses, yes, we would.
In fact, in April, we launched three different projects and they are doing fine. Similarly to the way the inventory levels and sales work fine. In Tenda, we do not have a model of last launch. We sell most of the products. We usually operate in the same regions all over the year. So in the same neighborhood, if you have sold out one building, you just launch another one and keep selling.
So it is for the retail rationale. It is just having off-the-shelf projects, not just one major launch. So launching projects is not as risky as you mentioned, because those risks would probably be more associated with medium to high-income customers or enterprises. So the bottleneck right now is the speed of approval in notaries and in local governmental agencies. Of course, it is not going to be zero, but it is slow. And of course, in some cases are worse. There are some processes that involve physical checks and inspections, and of course, people were working from home, so they cannot do that. So speed is jeopardized, although it is not completely halted.
Thank you, Renan. Thank you very much. It was very clear.
Next question from Andre Mazini from Citibank.
Hello, Renan, Osmo . Thank you. I have a question about a new program. Before COVID-19, you were just about to launch a new program with a different profile from the market, and now it seems that in the short term, those levels will be much lower than we expected if we did not have a crisis. So my question is: what will be the timing of implementation of this program? I think that maybe there will be more urgent things to be done, but do you think that it is going to be in the next quarter or later?
I don't know if there was any friction lately with other funding initiatives, but what can we expect to the MCMV market this year?
Thank you for your question. Regarding this new program, we should make a first disclaimer. It was thoroughly discussed, all the parameters, everything we believe that will work or not. We participated in this discussion. Of course, we are operating that on a daily basis. We like the way that the program was being built. Of course, it came a time when this was out of our brain's radar. The discussion has to do with final parameters. We have not followed up so closely this project. Actually, we have access to the same information you have in the media. The Ministry of Regional Development secretary publicly stated, made a public statement about this program, and the statement was very interesting to us.
What is important about this program is that it preserves the levels where Tenda operates, and there are parts when subsidies are necessary. But the timing is difficult to predict right now because of the COVID-19 scenario. We do not know politically when will be the ideal moment to launch a program like that. I do not think this is clear to anyone, and it is not under our control.
Although technically it has been very well designed, it is difficult to predict when it is going to be launched. If there was no COVID, because of the relationship established between MRD, and as we could have launched it earlier. As it has been seen in the media, it seems that the interest rates reduction, that was one of the parameters, is interesting. That is a good program. It is a good program. But it is very uncertain to be able to determine the timeline. It is out of our radar and it is out of our control.
Thank you.
Next question from Nicole of Bank of America.
Good morning. I have two questions. The first one is about the online platform. You have talked about the investments that have been made. So considering after COVID-19. You have a lot of physical stores. If it is an online sale, I imagine that the cost is much lower for online sales than for face-to-face sales. So what are your plans for sales channels for the future? My second question has to do with what you have seen in the first weeks of May. I understand that the sales speed is slow, but what about demand? What about supply? Is there anything changing regarding the level of trust? Thank you.
Thank you, Nicole. Thank you for your questions. Regarding the online platform, there are some aspects that have led to a higher initial cost. First, the infrastructure itself. The applications that customers have, all the IT infrastructure required. This is something that we had to develop much faster than expected.
Secondly, we also had to use different digital media. In the past, we used some of that in part of our marketing actions, but they have now become all of it. So we have good efficiency levels. We are adapting still. So in March was the first time that we used that significantly. As 100% of our investments were practically made in marketing, and are still making changes to efficiency and when. We still have a lot to do in terms of efficiency. Those two items involve an initial investment that will take a few months to be recovered.
We need to kind of fine-tune our efficiency levels in digital marketing. Thinking about after COVID times, you are right. With the results we have achieved in April, we will probably keep on these programs for a few months, and we will probably need to assess what are the efficiency levels between online and offline. We have now a new channel. We have also gained the trust of our clients.
They are now buying like this. It is better. We need to reassess. We have over 70 stores open. We might optimize this now that we have those new learnings. That is the impression that we have, that the post-COVID channels may be streamlined. Of course, not closing all stores, but we need to maximize the stores for sales. Reducing sales cost, maybe increasing speed. We need to analyze how this will go. Our perspectives are very positive in terms of sale.
I think that we will learn much more, and we are probably going to make smarter decisions in terms of speed and cost. That is the current impression we have. Regarding May, we have not seen worsening in results in May when compared to April. I know that in terms of a macro scenario, when you go to the lower brackets of the economy, it will probably have an impact in that population, but we still have not seen an impact in our sales.
Thank you.
Next question from Igor from Santander.
Good morning. The first question is a follow-up from the previous question. I would like to understand how much the 100% online sales represent in your overall sales. The second question is, do you see any different levels of demand between levels one or brackets one and two? Are you going to prioritize launches in these two different brackets?
Regarding online sales, we have a two-channel model. We have our own sales, our own employees, and also we use brokers, third parties. Sales made by brokers is widespread. They represent 35%, in April, at least 35% of our sales. This is a growing number compared to previous months. In 2019, we have bet on improving the efficiency of this channel, so we have observed a significant improvement. We have grown since 2019, and in the first quarter of this year, we have reached 35% of our sales through this channel. These brokers, these third parties, have also dedicated more to this business because the worsening in the medium and high social brackets was more impacted, so they are not selling so much, so then brokers focus more on the lower brackets. This has helped a lot. The other 65% of our sales are made online today.
Everything we do today ourselves is through online marketing. The documents are exchanged online and everything. We only need a personal interaction when the clients sign their financing and when we need to sign the documents in the bank. Now, of course, we are going to have bottlenecks for that, as we mentioned in the initial presentation.
Because Caixa Econômica Federal, because of the emergency relief fund, has been working a lot, so there is a bottleneck in service there too. That is a bottleneck that we are facing. Regarding different levels of demand, we still do not see in our portfolio a difference in sales conversion or in purchase interest between brackets one and two. Usually, we sell to customers until BRL 3,000 or BRL 3,500. Most of them are limited to this level of income, and the other bracket is about BRL 1,400 in income. We do not see differences in behavior at this point. Their purchase intent is very similar for both groups. When you move to higher income levels, maybe this could be a difference. That is not enough to see differences in behavior so far. Still, our focus is the same in both brackets.
Thank you.
Our next question is from Marcelo Motta from JPMorgan.
Good morning. It is also a follow-up question. Regarding the approval of launches and also the transfers from Minha Casa, Minha Vida, the MCMV program, do you see some pockets of better performance? Do you think that you are going to have a higher volume of transfers, or maybe you were transferring but not selling? How do you see the levels for these two items?
Thank you for your question, Motta. There are three points that are important.
First, we have the launches, then we have the sales, then we have the transfers. If we have bottlenecks in just one of them, we have a problem. Our major bottleneck today has to do with launches. We see that all local governments are interested and keep selling, but they have bureaucracy issues that are very difficult to solve over time, overnight.
In the case of Tenda, we are working from home and we are changing our processes very quickly. We can do this quickly, but local governments usually cannot. Although they have goodwill, we do not see a lot of efficiencies in the local governments we deal with. We have talked a lot about sales, but in terms of transfers, this moment in time when you sign with a bank for the transfer, we have a bottleneck there, but it is not zero.
We are implementing those transfers, but we still have a backlog. We solved the problem related to the budget. Now it is FGTS that provides that, but there is a new bottleneck, which is the time when you actually sign the contract. That increases the backlog. It is not a go or no go like launches. In transfers, it is just that the volume of transfer is lower than the launches.
In terms of the operations in notaries, it is the same. The contract needs to be registered in notary so that you can have the money released to you to the bank account. There is backlog there too. They are taking place. Notaries are interested in expediting their digital processes, but it takes time too. We are creating a backlog of records too. What concern us the most are launches right now. They are the ones that determine the whole demand. I think we have lower levels of stock in the region, and that affects the rest of the chain, including the production of units. We have fewer products launched. The whole volume of construction needs to be reduced. That is one point that requires more attention from our part.
Thank you.
Since there are no questions, I would like to turn over to Mr. Sanches for his final comments.
Thank you for your attendance. As you have noticed, it required some time. For the past year, we have seen things different from what we expected, and the results of Q1 '20 was affected by the bottleneck of 2019, especially related to transfers that have just been corrected in March. But the bottles have shifted to a different place, and in several indicators that, and things that are unpredictable.
All of us are dealing with that now, since we are in the scenario of uncertainties. The company wants to take financial precautions related to the health of our employees and shareholders. We understand that short-term results possibly are affected by everything that we are going through, as we could see in the first quarter.
We will manage the company so that we can keep on focusing on long-term initiatives that will generate value, such as the off-site program that potentially can generate a lot of value in our understanding. We want to have financial security to generate value in the long term. In terms of governance, we believe we are ready to do so. We have a crisis committee that is making decisions very dynamically. We shouldn't just meet once a month in times like this. Of course, it's very dynamic and we need really fast decisions.
We have a committee crisis. We have one to deal with the stakeholders, another one to deal with cash, another one to deal with the productivity of the construction sites, because we are also concerned with that. In terms of governance, we also believe that we are prepared to go through that because our board of directors has this ownership feeling in the long term. This is a moment of major changes and daily changes, and we want to keep the market updated about the impact and the measures we are taking. I thank you for your participation, and I wish you a good day.
Thank you. The results presentation of Tenda is completed. Thank you for your participation and have a good day.