Good morning, and welcome to third quarter results call for Tenda. Today with us, we have Mr. Rodrigo Osmo, CEO of the company, and Renan Sanches, CFO and IRO. We would like to inform you also that this conference call is being recorded, and that all participants will be connected in listen-only mode during the company's presentation. After that, we will start a Q&A session, and further instructions will be provided. Should you need assistance through the call, please press star zero.
Before we begin, we would like to inform you all that this conference call relates to third quarter financial results for Tenda in 2019, and also to information currently available. These forward-looking statements on the part of the company's management involve risks, uncertainties, and might refer to future events. Any changes in macroeconomic policies or in legislation and other operating results might affect the company's performance. Now, Mr. Renan Sanches, you have the floor. You may carry on.
Good morning, everyone, and thank you for participating in our conference call to announce Tenda's earnings results. We will start by making some remarks about third quarter results for 2019. After that, we have some time for Q&A. 2019 has been a very restricted year for the Minha Casa, Minha Vida program. The reduction in subsidies in the Faixa 1.5 bracket and more conditioning of credit for clients from the part of financial institutions led to an expected drop in profitability. In this scenario, we would like to highlight the strategic decisions we made, which have helped us bring good results throughout the year. We have taken a step forward in developing solutions more verticalized in 2019 with the launch of Project Faixa 2 E+ developments with 20-story high towers in São Paulo.
On top of that, we took the concept with Elevador for Salvador, the first urban city outside of São Paulo to come with verticalized launches. Projects with higher towers have access to land which are more centralized and located in some areas, which allows us to access a higher income range within the Minha Casa, Minha Vida pool, expanding our addressable market. Through our competitiveness in cost, we have managed to maintain attractive prices, which allows us to continue to grow. The verticalization of our buildings unlocked, in 2019, a growth hurdle in São Paulo, where we posted an annual growth of 117% in PSV launch in the last 12 months. The stake in São Paulo in the mix of launches already accounts for 41% of the PSV launch throughout the year, above 30% posted last year.
With this, even with a most restrictive scenario, the average price of units launched has increased by 6.2% vis-à-vis the same period of last year. In this quarter, we also took an important step towards our expansion in geography terms with the first launch in the city of Fortaleza, which is now our new area of operation. With this, the PSV launch in the quarter grew by 32% year-on-year.
If we combine that with the growth in net sales of 9.6% year-on-year, we are closer to reaching our lower level of annual prediction for net sales. With adjusted gross margin of 34.9% in the third quarter and of 35.5% in the last 12 months up to date, we continue to be within the guidance for 2019. Despite all that, two main factors pressured our profitability and should remain as challenges for the coming quarters.
One of them is the drop in the price of units launched in each region as a response to changes in the criteria for the Minha Casa, Minha Vida. Initiatives that brought better quality to our processes have helped mitigate those effects. The other one is an increase in construction costs, a consequence of the recovery in the sector. Materials such as concrete and steel on top of construction services such as land leveling and infrastructure installations have shown sharp increases in 2019 in terms of prices. In this scenario, the company's net profit reached BRL 64.6 million in the third quarter, in line with what we had last year in the same period. Year to date, the net profit was BRL 187.5 million, which is 23% higher than last year in the same period.
On top of that, for the last 12 months, we have presented a return on investment of 18.7%, a growth of 10.6 percentage points year-on-year. We also present a ROIC of 26.4%, up 4.5 percentage points year-on-year. Net profit per share, discounted treasury shares, was at BRL 2.42 in the last 12 months, a growth of 33.5% year-on-year. On the other hand, cash generation was negatively impacted by the stall and transfers for the Minha Casa, Minha Vida throughout that quarter. The situation was only brought to normal in September, which was not enough for us to revert the cash consumption in the period. Whereas sales grew by 12% when compared to the second quarter, the PSV dropped by more than 40% in the same comparison terms.
We remain focused on guaranteeing the effect of those transfers to revert that scenario, but there is a risk of a negative impact over this indicator for cancellations for the next quarter. Events such as those reinforce our importance of having a conservative financial management as we go through instability moments. We closed the third quarter with a net cash position of BRL 231.5 million. The equivalent of a ratio of net debt-to-equity of -17.7%. Looking forward, it is possible to see that new adjustment in those parameters and in the management of Minha Casa, Minha Vida will continue to bring down the profitability of companies which operate in popular housing. Movements such as those are healthy for the sustainability of the program, and they demand the players to operate with operational excellence.
Tenda reinforces its commitment with an operation focused on popular housing, trying to be the company that delivers the best return to shareholders and ensuring safety through a conservative financial management. With that, I close my comments, and we are now available for questions and comments you may have. Thank you.
Thank you. We now start the Q&A session. To ask a question, please press star one, and to remove your question from the queue, please press star two. The first question comes from Mr. Alex Zaha from Itaú BBA. Mr. Alex, you may carry on.
Good morning, Renan. Thank you for the presentation. I have two questions, actually. The first one has to do with this improvement in this backlog margin. That has to do with the São Paulo project. If we look at the pipeline for the short term of launches, when we look at those 40% ratio concentrating São Paulo, should we expect to have that level of concentration in São Paulo? In other words, we are more exposed to the São Paulo market.
Number two has to do with the transfers. You did say that we are reaching a more normal situation as of mid-September. That seems to be the case. So what can you tell us about the backlog in terms of receivables? Have you managed to transfer part of it? Should we expect a stronger cash generation in the fourth quarter? Or do we still expect some other kind of negative impact that will prevent you from transferring all that margin for the next quarter?
Hello, Alex. Thank you for the question. As for the backlog margin, you are correct. We had an increase of 80 basis points in the second quarter, from the second to the third quarter. That increase can be explained by a larger participation in sales in São Paulo. So São Paulo launches had already grown, expanded in the second quarter, but sales take a little longer to catch up.
So in the third quarter, we already see 37% of sales coming from São Paulo. That should stabilize at around 40% in the coming quarters, which is already happening in the launches front. But looking forward, we do not see relevant changes in that rate because we have other regions which are also expanding within the nine regions where we operate right now. Four of them have an interesting potential for growth.
São Paulo is one of them, and the other three are the regions where we have recently expanded to Paraná, Goiás, and now Ceará, with the city of Fortaleza, the capital. So we measure going forward, that rate should be kept, which would take us, given the current subsidies, a maintenance of the current backlog margin. As for transfers, your second question, in September, we closed September with an important backlog. We transferred 40% less than what we had transferred before.
An interesting number is that in 2019, companies spent about a third of the year not being able to make any transfers. That is a long time, so it has been a more restricted year than usual. On the other hand, we have seen October as a more interesting month. So we do see some recovery in terms of cash generation for the fourth quarter.
However, we still have uncertainties around as to the operating margins in terms of transfers from here on to the end of the year. Because there is part of the budget for FGTS to be consumed and other factors such as the segregation per state, which also sort of affect the operational front at this time of the year. There is some source of concern in terms of having a more stable operation in the fourth quarter. The base scenario indicates that we will have a different scenario for the end of the year. So we are getting ready for that, trying to anticipate transfers as much as we can. But today it is, as I said, a point of uncertainty whether fourth quarter will be positive or not so positive.
Okay, Renan, thank you.
Next question comes from Mr. Victor Tapia from Bradesco BBI. Mr. Victor, you may carry on.
Good morning, Renan. My first question has to do with the program. We are getting close to the end of the year. Your provisional measure has been approved at Congress, and we have more visibility about the program going forward. I would like to understand from you if you have more information about what is happening in Brazil in terms of terms, periods, and about, as it was mentioned, the segregation of subsidies per state.
Should we expect the same thing for next year, or should we expect to have a different dynamic? That is my first question about the mid to the long term of the program. How do you see that playing out? Number two, about cancellations. Because transfers were locked, there might be a higher impact on cancellations for this quarter. We are now in November. Do you have an idea of ballpark number of where those numbers will hover around?
Okay. Hi, Victor. Thank you for your question. I will answer the cancellations question, then I will pass the floor over. As for cancellations, if we draw an analogy to what happened earlier in the year, we can have a good benchmark of what might happen. Earlier in the year, we spent six weeks without transferring. Transfers were shut down till February. The percentage of cancellations in the first quarter was not affected. That was the quarter where we had more problems. But the percentage of cancellations for the second quarter, which is the quarter where we moved all those transfers, we saw an increase. So numbers were, we had 9% of cancellations in the first quarter, and we had 12% of cancellations on sales in the second quarter.
We do not know as of yet what that number will be for now. But what we have noticed is that, based on October's performance, we will see higher percentage than we saw in the third quarter, 9% and 10%, which is common for the company. So October already shows and indicates that we should expect a scaling up of transfers. We do not expect a much higher percentage than what we saw in the second quarter, which was we had a peak in cancellations, but we expect something worse in terms of the fourth quarter coming from the third quarter. When we make the sale, we take the client's credit to the CAIXA, and that credit has a validity term. If you take too long to transfer because of operating issues, you have to revalidate that credit, which will increase the likelihood that those clients will not be accepted.
That is why cancellations might peak. As for the future of the program, as you asked, there are many players in Brasília, many actors, if I may, that have different opinions. But what I can tell you in concrete terms is that the NG889, the directive, which creates a future dynamics in which the availability of subsidies will be much smaller than it is today. It will be restricted to 40% of the profits before subsidies. If we were to draw an analogy with what happened last year, that would lead to a number BRL 8 billion in subsidies for next year. But certainly, the profitability will decrease going forward. Because among other things, because of the end of Lei Complementar 110, because of lower interest rates, of course too, because funds are remunerated at lower levels. So we have a lower cash balance for those funds.
We should expect to see decreasing profitability levels for the fund, and as a consequence, lower levels of subsidies. I think that is the main new piece of news as for the future of the program. In our view, it might seem paradoxical, that is quite positive for the program. Because under the current conditions for the program, there are several places, areas, where the accounts can be easily closed. The math works for some regions.
But the market loses discipline. We would rather play a game where only the most efficient players, with the lower execution costs, only them can be successful, profitable under the program. The program is moving towards that scenario, which is quite positive in our view. This context of restriction, as it was mentioned, in terms of subsidies, risks some of the brackets. Because the different brackets will be differently affected.
In terms of scope, I would expect the government to prioritize the lower groups. That is the major piece of news. Very specific things for next year's program, I don't think there is nobody in Brasília. It is difficult to say. Even the program managers would be able to give you a clearer picture for next year. A lot of information still needs to be processed, how Congress will work on the NG889. A lot of uncertainty, even for the fund managers.
Just to add, Rodrigo. The profit before subsidies. Are we talking about subsidy on the budget?
I think it is about the effective profit, the real profit. That is how I understand. I am not really sure, but my understanding is the following. The program starts the year based on an expectation in terms of profit for the fund. Then as we get closer to the financial statement deadline, a new number is calculated, an adjustment is made vis-à-vis the previous or the early expectation.
Okay, thank you.
Next question comes from Luis Tacchini from Credit Suisse. Luis, you may carry on.
Hello, good morning. Thank you for taking my question. Two things related to your gross margin. If you could perhaps give us some more color on this trend for provisioning. You had two quarters where you reviewed the pro soluto number. But when we look at 2018, the level of provisioning for that year, I would like to understand what kind of provisioning could we expect going forward. Number two, I would like to understand how you see this revenue mix in terms of geography.
You are more concentrated in São Paulo, as we saw, and we see backlog going up because of that. Do you actually believe that by concentrating on regions where you have higher margins, you did mention Salvador, in the presentation. I would like to understand if by doing that, you could, or you can somehow concentrate your operations on areas where you have higher margins. In that way, you would be able to offset the industry sector, that you would now sort of hedge your positions by doing that.
Hello, Luis. Thank you for your question. Number one, as for the gross margin, we had a third quarter, which was quite interesting in terms of pro soluto provisioning. Where was that coming from? Tenda has been investing for the past 18 months significantly in professionalizing and in digitalizing the collections area.
We brought in people with a lot of experience, and they have managed to consolidate all that work internally. We are quite happy with the results. Number two, in terms of automation and digitalization of collection processes, we now have new ways to make collections, a digital collection rule that makes processes more expedited, less bureaucratic. We have changed our level. We are much more modern in terms of practices or best practices. As we were before, when compared where we were before, the gain was significant. We were quite outdated in terms of collection processes. That is where that money is coming from in terms of P&L. When we look back at the year 2019, the way we make our provisions is anchored in our collection performance for the last six months.
We noticed that from March on, there has been a flattening of those numbers at a better level. We now see stability going forward. We haven't noticed big improvements in terms of default percentages. We have a new normal, if I may. Because provisionings are based on averages for the six months. From March through September, we have already reflected all the gains we have reaped so far. There is no more added gain to appear or to emerge in the coming periods. We do not see major expansions going forward or major changes in that level. We do believe, as I said, that that number will be more stabilized. In terms of revenue percentage, you are correct. We varied between 1% and 1.5% of the revenue as provision. Today, we are positive because you are reversing a trend.
But as we look forward, we still have a negative impact in terms of what we used to do before, which is the change in mix for the program. Until 2018, we had more than 50% of our businesses in the Faixa 1.5 bracket. One of the characteristics of that bracket is that it does not require a lot of pro soluto. The provisioning we had within that bracket was quite low. That is why you remained around 1.5%.
On the other hand, now the program has been restricted, as it was mentioned, starting 2019. My pro soluto percentage coming from sales will increase. Why? Because we have an increase in the Faixa 2 bracket increase. We go back to a pro soluto level, which was close to what we have before we had the Faixa 1.5 bracket. There is a balance of forces.
I have a lower provision because we have better quality in collecting, but I also have a larger pool of pro soluto on which I need to apply that new provision because I have an increase in the Faixa 2 bracket percentage. No big changes when compared to what we had before, percentage on revenue. Number two, as for the backlog margin, and especially given the changes we've made in our business model, in our geographic spreading.
The current mix that we have today for revenue and sales, that mix should be maintained. On the one hand, we are scaling up our operations in São Paulo, and we are running fast in São Paulo, and Salvador also. That's a very interesting test in Salvador because that will allow us to access central areas in Salvador, which were inaccessible for us before. Our sales potential is now higher.
We have a higher average price also. That offsets construction costs and higher land prices as well. So that strategy has proven to be the correct one. On the other hand, we have geographic expansion, which is increasing in areas where we have lower margins. Of course, those are areas that generate value for the company. It's a very positive marginal result, but the gross margins for those new operations in other areas, for Curitiba, Goiânia, and Fortaleza, they are quite inferior, quite below to those seen in São Paulo, and also than those in the best or better areas in Rio or in Salvador. So we have a balance of forces, as I said. We do not expect under the current program criteria, we do not expect major changes in our backlog margin.
We can also see that Tenda has a backlog margin of around 38%, and we delivered a gross margin of 35%, in adjusted terms, 34.9%. That number, 35%, was driven by this reversal in pro soluto. If we were to do a recurring margin calculation, assuming that the pro soluto would go back to previous levels, we would have a gross margin adjusted at around 33.5%, which is still within that range of 33%-34% in a normalized situation for the company.
What would be something to call your attention? Tenda expects to see changes in the program next year, 2020. That reduction in subsidies proposed by the government, one of the alternatives is that this will impact the size of the program or even the amount of subsidies for each unit. We do not know how that will play out as the government advances its discussions.
But we are likely to see more restriction in terms of interest rates or access to credit and so on. If that happens, Tenda will also see a drop in margin on top of the recurring margin I have just mentioned. In the third quarter, the recurring margin was 33.5%. So we need to wait and try to understand what changes will come in the program next year. But there is a perception and a prediction, if I may, that the industry as a whole, the sector will suffer in terms of gross margins because of all those changes that we expect in the Minha Casa, Minha Vida program.
Okay. Thank you. So you see the subsidies dropping and everything. So you expect to see numbers going down in TS3, for example. So that could also affect credit for companies, right? Is that it?
It's difficult to say how that drop in total subsidies will translate in the reduction of subsidies per client. But we have been saying this for some time now, for some years. We knew the program would be more restricted, with lower subsidies per client. As that happens, companies which are less structured, less professional, wouldn't be able to operate under the program. Open up new avenues for those companies which are more structured. But the exact format of those changes is still being discussed by the government. I wouldn't risk making any projections along those lines.
Okay. Thank you. Have a nice day.
Our next question comes from Mr. Ygor Altero from Santander. You have the floor.
Good morning. Thank you for taking my question. I'd like to understand, in your capital structure, it is clear that you have a very cash surplus. I'd like to understand how you plan on reaching your target leverage level. Also in terms of share buyback, dividend payout. Also a question about new areas that you are operating. How is Fortaleza faring? Is it performing as you expected?
Thank you, Ygor Altero. As for our capital structure, we do have a cash surplus. We have consumed cash in the third quarter, but we still have a company which is quite deleveraged. Our capital structure policy is to remain a range between -10% and +10% of net debt-to-equity. Today, we are at a -17%, so there is room for us to reach that range of -10% to +10%. The way we think about capital distribution, we have the following points. We have been paying dividends well.
We have reached 70% of payouts in the last quarters, consolidating the past 12 months. That is a reflex of the company's analysis that, number one, we do have enough cash balance internally. It is not enough to be leveraged. You also need to have a cash surplus, and we are quite rigorous in terms of maintaining a minimum cash for us to go through this turbulent time in a safe manner. We also need to look at the macroeconomic scenario.
It needs to be favorable to ensure that cash surplus can be paid out, and we will not miss that going forward. Number three, we do not have a cash requirement within the operation. We do not have requirements to maintain that cash inside the company. So we look at those three pillars before deciding the payout. Having said that, we have been paying out dividends.
We have been buying back shares. We do like the share buyback option. It generates value for shareholders. But we have already had also anticipated the minimum dividends on a quarterly basis so that we can pay out early on so that shareholders can make their decisions early on. That is a trend. We are now reworking on our business plan. That is the time of the year where we renegotiate our business plan with the board and the executive office. So we are reassessing our cash requirements for last year. We assess the fixed income market. One of the assumptions that we need to be able to refinance ourselves in the market, so we need to look at that as well.
In a month or two, we will have a new analysis coming from that in terms of what kind of surplus we have that we can go ahead and pay out. As for new cities, new areas, we have started Fortaleza just now in September. So October was the first full month of sales for us in Fortaleza, and the results were within what we expected. That is what we expected. We see a high, strong demand, but at the same time, we have a market where the average income is lower. So we will have an interesting PSV, but at lower prices. But it is too early to say anything else. We have not yet tested transfers. We have not tested as of yet construction works, executions. We are still discovering many things.
But as of now, we are quite happy, satisfied with what we have seen, even though it is still early on in the process.
Okay. Thank you.
The next question comes from Andre Mazini from Citibank. Andre, you may carry on.
Good morning. Thank you for the call. My question is about the operating expenses. When we look at the nine-month mark, legal expenses are growing, sorry, dropping from 28%, which makes sense during the phase-out, because of the phase-out of the legacy projects. If you could break it down, out of those BRL 23 million, what is legacy? What is recurring? What has to do with the new operation? Are legal expenses actually dropping? Also, if you could talk about labor expenses. If you could touch upon those numbers for the nine months of the year, I would appreciate it.
Thank you. Hello, Andre. Thank you for your question.
Okay.
As for the legal issues, yeah, so far, year-to-date, this has been a year where we only have trials for the causes that we call mass causes, civil and labor causes of smaller size, issues where we can have a very good predictability. So that result is quite pure, precise, just for those legal cases. And there is a phase that was happening, as you mentioned. On the other hand, that is the first time we spent nine months without suffering the impact of a major legal issue, and there are relevant legal issues to be judged and tried going forward. When that happens, we see important changes in our provisions, of course. Those are legal cases that we had with older partners, usually larger labor issues or tax issues, which are larger.
When a trial happens around one of those important cases, the effect is quite relevant on the company's numbers. They disconnect from that number of BRL 15 million. But we have spent nine months so far with no major news. But there are cases and lawsuits to be judged, to be tried, and of course, we cannot win them all, right? So we need to wait, and that means that even though we expect to see a phase-out for the mass-suits, as I mentioned, the most or the more strategic issues or cases might still impact our numbers going forward.
So let us make that clear. There is still some risk on that front. If you try to separate legacy and the new business model, less than BRL 2 million in the third quarter has to do with the new business model. But that is not a recurring result. We cannot project that number going forward, far from it, BRL 2 million per quarter. No. There is a lag between executing the development and having all that contingency affecting a result.
There is a lagging, as the suit is filed, as the suit is judged or decided upon by the judge, a long time elapses before that comes to an end. So that makes it difficult for us to model contingencies. But for now, what we have seen, given the new model, is that the main drivers for legal suits that we had in the legacy companies are no longer there, which was mainly delay for delivering units. So clients wanted to be paid higher fines that they were entitled to, and they usually won. Number two, labor suits filed by outsourced employees. It is a legacy problem, where the company hired outsourced employees, and they would always win as well.
Today, we use a significantly lower level of outsourced employees. The two main drivers are no longer present in this new business model. On the other hand, other lawsuits, legal suits still remain, so it is still difficult as of now to predict when that curve will stabilize in the future. But we can certainly expect an improvement given the fact that the main drivers are no longer present, as I said. As for other expenses, between contingency and other expenses, other expenses are where we have lawyers and attorneys fees. Today we have a large suit being judged, which led to a high attorney fee. That is why the line increased. But our suggestion is for you to look at those two lines combined as we look at them inside the company.
Okay. Thank you. Have a nice day.
I would like to remind you that to ask a question, please press star one. Please stand by as we poll for questions. Since there are more questions, I turn the floor back over to Mr. Sanches for his final remarks.
I would like to thank you all for participating in our earnings call for the third quarter of 2019, and a final announcement. As we have been talking to the market for some years now, we believe that the scenario would deteriorate, and it has happened. The regulatory environment changed the program early in the year. CAIXA became more rigorous in terms of granting credit. We did not have those big fairs that took place in May, which helped us sell. And we have a cost pressure, which is also increasing, and of course, the price of land is also increasing.
Only in São Paulo for now, but we understand that this is only starting. The market is warming up, and it will affect everyone in the market, not only Tenda. But we have been getting ready for this moment. We believe we have the right strategy for this right moment. We focused on popular housing, the larger metropolitan areas where demand is higher and resilient. And because we have resilient demand, we were able to apply a very strong industrial approach.
So we are managing to be the lowest cost provider and have been responding very dynamically to all those events. The fact that we moved from the Faixa 1.5 bracket to the Faixa 2 bracket, we were able to adjust our mix very quickly. That affected our PSV, of course, but the company's dynamics were not affected. We have our own fairs now.
In the third quarter, we see an increase in sales, driven by that. So we are more agile and more nimble to adapt our strategy. And that makes us also very resilient in a moment where we expect more changes to come. So going forward, we believe that the environment will become increasingly challenging, which will bring pressure on the company's margin, and Tenda's margins as well. And we are working inside, doing our homework, and looking at recurring margins. If the subsidy per client changes, we will see impact that as well. And if the market really accelerates, we will also see impacts. And we are working with those predictions. Given the funding restriction, which is the main bottleneck today for the FGTS, where their money is coming from.
In the long run, we see that as positive because that will remove from the market less efficient players, which opens up new alternatives for us. Tenda's operating strategy is one of growth. We have been delivering growth, and we still believe we have great potential for growth. It is a bold strategy, but it needs to be combined with a conservative financial strategy on the other side, because we have a program that is very specific.
We have a lot of uncertainty, and we need to be sure and safe that we can go through those turbulent times without destroying value. How do we do that? We have a good policy of low leveraging and very restrictive policies. We launch small developments, which is our MO, and we have only two years of land bank, so that we are not high on inventory in this industry.
What we are doing today is to exploring our strengths in terms of reinforcing other competency, other abilities, other skills to generate value not only for next year, but long-lasting, sustainable growth for the shareholder. That's where we believe we have our mandate around. Once again, thank you all for participating, for your time, and let's move ahead to the next quarter.
See you next quarter. Thank you.
Tenda's earnings call is now over. We'd like to thank you all for participating, and have a nice day, everyone.