Good morning, and welcome to Tenda's earnings release call for the first quarter of 2019. In today's conference call, we have Rodrigo Osmo, our CEO, and Renan Sanches, CFO and Investor Relations Officer. We would like to inform you 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 at any point, please press star zero. Before beginning, we would like to inform you that this conference call will address Tenda's financial results for the first quarter of 2019 and based on information currently available. Management's statements involve risks, uncertainties, and may make reference to future events. Any changes in macroeconomic policies or in legislation and other operating results may affect the company's performance. Please, Mr. Sanches, you may proceed.
Good morning to all, and thank you for participating in the teleconference of the earnings results of Construtora Tenda. Let's start by making some considerations about the key aspects of the first quarter results of 2019, and then we may have room or space for Q&A session. In the first quarter of 2019, we were resilient in the face of a challenging scenario for housing. We started this year with changes to the Minha Casa, Minha Vida rules, which imposed restrictive new rules for the one and a half program. We were important in reducing the pressure for FGTS resources in view of the need to ensure the sustainability of the program in the medium and long term.
In addition, the beginning of the year was also marked by bottlenecks in contracting of projects and the transfer of customers to the banks, which ended up having a negative impact on launches, sales, and on lending in this quarter. New steps created for the contracting process impacted the volume of launches at the beginning of this year. This is because one of the pillars of our business model is to launch once contracted. That is, Tenda effectively launches the ventures only when they are fully contracted with a financial institution. In the sales process, we identified changes that restricted the access to credit of the beneficiary families of Minha Casa, Minha Vida. The on-lendings which had already been impacted by the scarcity of the resources at the end of 2018 continued to be compromised due to the late availability of resources for the program earlier this year.
Amidst this, Tenda moved quickly to adapt to the new scenario. We adopted a new launch and sales strategy with the goal of minimizing the impact of reduction of the one and a half bracket on the sales speed. This migration for the sales force to the new format of the program was completed successfully in the first quarter, which has brought us to a new level of SoS. Tenda's new net SoS dropped to 27.5%, below levels seen in 2018. Also in this quarter, we noticed the reduction of the importance of the one and a half bracket in Tenda sales mix, representing only 26% of the net sales versus 56% in 2018. Amidst this new scenario, our operating performance allowed cash generation and net income growth. Gross margin was 35.8%, close to the upper limit of the guidance for the year.
In addition, operating expenses fell in this first quarter compared to the previous quarter and to the first quarter 2018. This has led us to a cash generation of BRL 37.9 million and a net profit of BRL 49.8 million in the quarter. As a result, our return on equity for the last 12 months reached 17.8% in the first quarter 2019. Regarding the capital structure, the ratio between net debt and shareholders' equity remains close to -25%, which has allowed us to promote some capital distribution initiatives.
In the past 12 months, we have used BRL 193.8 million in two share buyback programs. In addition, we started a new third buyback program in April. Also in April, the ordinary general meeting approved the payment of BRL 13.3 million in dividends, which added up to the BRL 25 million distributed at the end of 2018, also as a minimum mandatory dividend.
Those initiatives to distribute capital to shareholders should help us achieve our long-term goal for leveraging between -10% and +10%. In order to reconcile the distribution initiatives with a conservative capital structure and a robust cash, Tenda has successfully completed in early April its fifth issue of debentures, totaling BRL 150 million. Once again, we have reinforced our presence in the capital market, gradually reducing the average cost and increasing Tenda's average debt duration. In the stock market in January 2019, we entered the IBrX 100, an index made up by the 100 most rated companies in B3, and we continued to reinforce the initiatives to guarantee paper liquidity. In March, we promoted the stock split with the objective of adjusting the price of our paper to a more accessible level to all investors.
Before opening up for the Q&A session, it is important to talk a bit about the current scenario, which continues to pose challenges to Tenda. In addition to the more restrictive environment for customer credit approval and increased construction costs, there are still uncertainties regarding the availability of FGTS and budgetary resources from the federal government for the year of 2019. Amidst this current scenario, Tenda has concentrated its effort in three main fronts. First, to pursue operational excellence, proven by cash generation, even in more troubled quarters. Second, maintaining a conservative capital structure with low leverage. And finally, to act in metropolitan regions where the housing deficit is disproportionate and the interest barrier is greater. Thus, we remain focused on the goal of seeking the greatest return to shareholders in this industry. With that, I close my comments, and we are now ready to entertain your questions.
We are going to start the Q&A session. If you wish to ask a question, please press star one, and to withdraw your question, dial star two. Please wait while we collect the questions. Our first question comes from Mr. Luiz Mauricio de Garcia Paula from Bradesco. You may proceed, Luiz.
Good morning, Renan. First question is about sales, amount of sales. We closed that one and a half in April. I would like to know the dynamics of sales over supply. The idea was to maintain a higher SoS to favor [inaudible] . How do you see the trade-off between this SoS and gross margin? I think the focus will clearly be in this measure, and it is important to understand this movement, this dynamics in April. In a month that it was more stabilized, how do you see these two indicators are behaving for us to understand?
And second point, we have reinforced capital structure with the buyback program, and we have the dividends that have been announced. How do you see that on the buyback side, trying not to impact so much the liquidity of shares? Could there be some kind of measure of extraordinary dividends? In the past, you did not want to do that because you had few creditors, et cetera. How do you see this movement from now on? Thank you.
Good morning, Luiz. Thank you for your questions. Regarding our SoS, we had April that was good, within our expectations for the products we had launched. We look at SoS ahead. We made a strategic option considering the program that we started investing in 2019. We could lose price to try to maintain SoS or lose SoS to try to maintain price.
We prefer to maintain the SoS as high as possible, of course. This brought a relevant impact on our SoS, considering first quarter 2019 and the first quarter 2018, we operated at a lower level, and this is the level that we consider to be feasible from now on. So the difference in terms of quarters, the first quarter is usually the weakest in the year. We have noticed this in the past three years.
The second quarter seems to be the highest because we have the big Feirão, the big market of Caixa Econômica, and it helps a lot the developers with low income. We still have in definition the movement of Caixa Econômica. It might be postponed, may not happen in the first semester, and this seasonality of a great increase of SoS in the second quarter may not happen because of this Caixa Econômica's big market or Feirão.
We have decided in the projection of net sales that we gave, actually, we had an impact that was more relevant in gross margin than we did in SoS. The impact on gross margin was little evident to the market as a whole because in the past year, we had high impact on the gross margin on the legacy. As the legacy reduces its share or participation, the margin is affected. When you see performance of 2018, we had 36% of gross margin, and breaking the new model, the business model, our margin was 42%. So the market drained 4% of gross margin. So we have no expectation of such drainage that is irrelevant from now on.
Only looking at the new business model, speaking of a gross margin that was 40% to a guidance of 34%-36% with small impact of legacy, it is a reduction that is We are experiencing, but the level of the first quarter reflected that quite well. Looking at the capital structure, your second question, we actually opted for buyback last year. When we sum everything we did of buyback and dividends, we delivered 86% payout on profit. That was a major volume on return for our shareholders. This year, as you mentioned, we started a profits reserve that was positive finally. Now we can think about distribution strategies that is slightly different. We have opened up a new program of buyback to continue having the buybacks that we understand generate value for the price of stock that we are practicing.
On the other hand, we tend to pay dividends quarterly, advancing a minimum that would be paid only next year. We have constant payments of dividends. The assessment of what we will do with the excess capital reserve will be more based on a decision year-end, post yearly evaluation for our business plan to see the format and the volume of the additional distribution. Looking first if the company will need capital in the future. It is not the trend, but in the past years, we have not needed to invest capital in the company. We generated cash in a relevant way in the past years. Looking at the regulatory situation in terms of capital markets, we see good comfort that we will not need money in-house, and that we have a capital structure that allows us to release in a good regulatory environment.
We will have additional distributions assessing which is most appropriate for shareholders between buyback and dividends. The reinforcement or that supports the share. Profit has grown in a relevant way from 2018 to now. Income per share has grown, earnings per share has grown even more considering the strategy, because we generated value. We should have some balance between dividend and buyback, but this assessment will be conducted later towards the end of the year.
Okay. That is clear. Thank you.
Our next question comes from Mr. Guilherme Mendes from JP Morgan. You may proceed.
Excellent, Renan. Good morning, everyone. I have two points on our side. One, active debt. You talked about the active debt and the possible compensation on the fund, and I would like to know your view on a possible change in the structure of the fund as to the program, as the institution that Tenda is, how to deal with that with the government. A question in terms of the outlook, how you see the second quarter up to now since the beginning of the year, is this path a bit slower? If this is more integrated and the estimate of sales for the quarter that did not impact the first quarter, and it should be sort of fixed under the second quarter. That is it.
Good morning, Guilherme. This is Rodrigo. The government actually has a work group set up to study alternatives for the FGTS. Well, this is totally supported by us to create a situation or a structure of FGTS that is sustainable. Our understanding is to have sustainable FGTS, both from the standpoint of a balance that allows a volume of investments that is constant over time, and possibly perhaps even less than the amount of investment currently. Also sustainability requires that the quota holder of FGTS has a compensation that meets the desires or the wishes of the quota holder.
The report you must be referring to is an exposure of a statement of Waldery, the Secretary of Finance, when he talks about the studies being carried out. When he talks about the potential withdrawal, he talks about several possibilities. He says that the government wants to have long-term sustainability of the fund.
Our understanding is that today there is no room for additional withdrawals, and actually what is happening is that we have discussions on adjustments of FGTS to allow it to have long-term sustainability. These debates have been taking place. Well, there have been several organizations contributing to that. We see that the root of this debate are quite ascertained. They have been technical, high level, and the expectation is that over the year, we should have some definition regarding this.
Guilherme, regarding the second question on lendings and the transfers have been normalized. This process has been normalized from mid-February. We've had a stable operation in March, April. We haven't noticed major changes in the process, and the systems are all stabilized. On the other hand, what do we have in terms of impact related to on lendings and their operations? First, the conditioning of customers.
Conditioning is how much Caixa Econômica approves on the total capacity they would have to finance. So the percentage is smaller. Well, that according to the credit scoring of Caixa. This conditioning level has grown a lot in 2019. We had changes between February, March, and April. February, this conditioning was very high. March was a bit better, and April was high. But all those levels are above what they were in 2018, and we are not yet able to say what would be stability for 2019. So this move in the credit analysis of Caixa Econômica impacts our ability of pricing, so customers are no longer able to pay as much as they were able to. So we've had different prices first quarter there reflected in these words of this condition precedent, and this actually impacted the margin to be at a level of 35.8%, but a bit higher.
In addition, we had some units to transfer, a backlog that was generated in 2018 that were not contracted in 2018. So we contracted the development in parts and in three parts of 100, for example. And the last part of certain developments were not contracted, and that led to the on lendings of the first quarter not to be carried out. This is about adds up to 600 units. That's why we've increased our provision of terminations in the first quarter. So the balance of Tenda considers that all those customers will be sold this second quarter. This is the accounting rule we use, but we hope that via renegotiation, many of them will return to the game. We had to remake their credit analysis because that matures. In practice, we still have a backlog to resolve in the second quarter, and part via termination, part via renegotiation.
This may lead our termination to have a two, three-point increase in our terminations. We'll see what happens to the portfolio, but the backlog should be cleared and solved in the second quarter. In the part of sales we've mentioned, we don't believe we will have that seasonality that is common in the second quarter of increasing SoS because of the Caixa Econômica's Feirão. It should be postponed. In terms of launches, we are totally adapted to the methodology of contracting developments of Caixa Econômica, and we don't see that as a bottleneck. We have several legalizations to be made. This quarter has a lot of legalizations for Tenda. Half of the launches depend only on my concluding the previous sales phase. This quarter I have many more to make rather than opening phases. This brings a variation.
We see city halls with problems different from what we had last year. We have a lot of deeds that have to be proceeded, there is a bit of bureaucratic risk. What we expected in terms of launch of the first quarter is not lack of raw material, it is timing for us to see whether we actually manage to close everything within June to get to the growth we were expecting due to some bureaucratic issues.
Thank you very much.
Perfect.
Ladies and gentlemen, we would like to remind you that if you wish to ask a question, you just have to dial star one. Our next question comes from Gabriel from Itaú BBA. You may proceed.
Good morning, Rodrigo, Renan. I have two questions. First, in your letter of management, you comment that your negotiations with Caixa is more complicated because of the approval committee. I would like to have an idea, quantitative analysis in the midterm, five, 10 days, or if the delay has been some months. If you see some potential downside for the year considering more challenging scenario. Second question is we see a drop of others. If this drop and this is the level we should expect from now on, if you have any provision in some specific project that could change this dynamic for the rest of the year. Thank you.
Gabriel, thank you for your questions. Regarding Caixa Econômica, actually, there is a committee that has been set at the central level. After all technical validation, this committee validates final validation in Brasília. It is a committee set up with various skills, and we actually adapted to it in February. In practice, it means a week, 10 days more in terms of time of approval, but we do not see that as a penalty. To deliver the launches for the year. We can deliver our flows with this committee. In our view, this committee is something they have been looking in their action. They are quite positive for Minha Casa, Minha Vida.
We see they have an important thing regarding delinquency per company. We are very much concerned about the program in the future. How much money the program brings to the balance of Caixa. Caixa cannot have a deficit in its operations. Tenda has been approved, and those tests, it is important, showing that Tenda is in balance regarding the delinquency rate the bank expects. But it limits possibly some companies that may have their financial conditions that are more complicated. So we see this committee quite favorably.
Looking in the line of other expenses, in practice, the first quarter, we had BRL 3 million impact on those, what we call strategic causes. It is not mass legal represented by civil causes, customers or labor causes, our workers and work, the construction sites and sales. So it is actually part of strategy, and we have an impact of BRL 3 million in this line of others in the first quarter.
Looking at this mass cause, they maintained predictability that we expected. We can be quite predictable in this kind of cause, but the strategic causes may continue to occur and break some peaks in the results as it was the case of fourth quarter last year. The volume that graced a lot because of these things. This quarter, the impact was lower because the cost was smaller, BRL 3 million, whereas last year we had over BRL 10 million.
We can have predictability. I'd say it's possible to obtain this level in these causes, but it's hard to predict strategic causes. We have some strategic causes to be trialed and processed by the judiciary. Looking ahead, we don't imagine this kind of cause. Most of those strategic causes we're talking partners that no longer has this partnership for at least six years. Once this goes through arbitration, legal procedures, we expect a significant reduction in those kind of strategic causes.
Perfect. Thank you.
Ladies and gentlemen, once there are no more questions, I'd like to give the floor to Mr. Renan Sanches for his final remarks.
I'd like to thank everyone for your participation and actually reinstate the effort Tenda has made to increase the profit for shareholders. We have had a successful trajectory in this sense. This is very, very visible in our return on equity. We got to level 17.8% in past few months and earnings per share that has grown in a relevant way considering the buybacks we've been carrying out. We believe this is a very challenging year for the low income bracket as a whole.
We have been having relevant changes in the current administration and people and the management of the funds and management of Caixa. In the long term, we see those changes as very positive because they tend to bring our program to a more stable level that leads Caixa to feel comfortable with the quality of delinquency of customers and FGTS can be healthier and solvent in the long term. So in Tenda's view, the most efficient companies are those that will continue operating in the same market with tightening of credit of market with fewer resources from FGTS.
Tenda has the efforts to actually be in this position, in this launch of being an efficient company that would benefit the most of this future stability. Precisely, this is what we lack considering both in terms of FGTS, the fund, and the regulatory changes we are experiencing. In the long term, everything we've been going through this year should bring positive effects for the most efficient companies. Tenda is in there. In the short term, we have these fluctuations we've been experiencing, but we have operational strategy of capital structure and excellence in operations to go through this with a fewer impact possible. So this is it. Have a good day, and I wish you all a very good weekend, and thank you very much.
Our earnings result conference of Tenda is concluded. We thank you all for your participation and wish you all a good day.