Good morning, and welcome to the earnings release call for Construtora Tenda for the fourth quarter 2018. We have with us Rodrigo Osmo, the company's CEO, and Renan Sanches, CFO and Investor Relations Officer. We would like to inform you that this presentation is being recorded, and all participants will be in listen-only mode during the presentation. Ensuing this, we will hold a question and answer session.
Should you require assistance, please press zero. Before beginning, we would like to inform you that this conference call will address Tenda's financial results for the fourth quarter of 2018 and is based on information currently available. Management statements involve risks, uncertainties, and may refer to future events. Any changes in macroeconomic policy, legislation or other operating results may affect the company's performance. Mr. Renan Sanches, you may proceed, sir.
A good morning to all of you, and once again, thank you for joining us in the conference call to release results for the fourth quarter 2018 for Construtora Tenda. We are going to begin making remarks on the highlights for the quarter and for the full year 2018. Ensuing this, we will be available for the question and answer session. The year 2018 was the consolidation of our current business model initiated in 2013, offering better operational results, guaranteeing consistent returns to our shareholders.
We launched 13,636 units in 2018, a growth of 16% vis-a-vis 2017. With this, we totaled BRL 1.9 billion in PSV. Besides consolidating our presence in regions where we have a footprint, we continued on with our rational growth strategy, expanding to Goiânia, the eighth metropolitan region. Our land bank grew 33% vis-a-vis 2017, totaling BRL 8.9 billion.
The land acquired represented more than twofold the PSV launch, reinforcing our commitment to maintain a land bank equivalent to three years of launch in each region. It is also worthwhile recalling in April 2018, the delivery of the first development with an elevator as a milestone, making these apartments attractive with similar costs, broadening the absorption of demand in the largest metropolitan region of the country.
In 2018, we had good operating margins and cash generation, thanks to our efficiency and cost reduction. Adjusted gross margin was 36.3%, 0.3 percentage points above our expectations. Cash generation was BRL 261 million in 2018, further deleveraging the company that reached a net debt and shareholders equity of -26%. We reinforce here that the long goal for Tenda is to have a conservative but more balanced capital structure, oscillating between -10% to 10%.
To aid this process, we have held several initiatives to share dividends with shareholders. We opened two buyback programs in 2018. In May and November, BRL 184 million were available for execution, BRL 149 million were bought back in 2018. The buyback programs were complemented with the cancellation of 2 million shares with a positive impact on share price.
In December, the company paid out BRL 25 million in interim dividends. With consistent operational results through time, Tenda attained BRL 200.3 million in net income for 2018, with a ROE of 17% for the year. With this, our shares rose 61% in 2018, well above the 15% appreciation of the Bovespa. Besides this, the traded volume of shares throughout 2018 at the beginning of 2019 led us to the IBrX 100, made up of the most negotiated shares in B3.
The year 2018 began with a change in the format of Minha Casa, Minha Vida, reducing the possibility to work in the Bracket 1.5 . Because of the greater share of Tenda in this bracket, some of the company indicators, such as SoS, had a performance above expected in 2018. The changes announced in Minha Casa, Minha Vida should contribute positively to the sustainability of the program.
Our expectations for adjusted gross margin and net sales announced for the year 2019, released in February, already include the changes in the program format. In a challenging year for the entire market geared to the low income bracket, we pursue our mission of being a company that delivers the best returns to its shareholders. With this, I would like to end my comments, and we are at your entire disposal for questions.
Thank you. We will now go on to the question and answer session. Should you wish to pose a question, please press star one. If you would like to withdraw your question from the queue, press star two. Our first question comes from Mr. Gabriel Simões from Itaú BBA.
Good morning, Renan. Thank you for the presentation. I have two questions. First, in terms of your launch pipeline for 2019, do you have any project in the Bracket 1.5 ? What is happening with this? The second question refers to other expenses. You closed the year close to BRL 80 million with a drop vis-à-vis 2018. I had expected a greater drop. What is your expectation for expenses in 2019? Thank you.
Good morning, and thank you for the question. When it comes to the budget for 2019, we have already launched developments at the beginning of the year with a new modality for the Bracket 1.5 . Because of this, we have a limitation of units for development. We are complying with a change of format. Secondly, the sales of these new hirings are being done with a subsidy. Systemically, this is working very well according to what was projected.
As we had imagined, this will have an impact, a twofold impact. We would have to reduce the price to continue selling to the same customer as in 2018, or we would have to reduce the speed of sales if we had the price of last year. In Tenda's strategic evaluation, it makes more sense to maintain the speed of sales and not maintain margins. We are doing our utmost to maintain our target market. Now, what does this mean?
This, of course, will represent a reduction in speed of sales. When we look at the performance of speed of sales throughout 2018, on the average, it was 20% quarter-on-quarter. When we look at the performance in periods before the existence of 1.5, as an average, Tenda had 23%. As Tenda's strategy in 2019 is to maintain the target market of 2018, we think we will balance the SoS between 20% and 30%, but we are expecting a drop in SoS.
When it comes to other expenses, in fact, we did have a reduction vis-à-vis 2017 of 17% in that line item compared to the two previous years. At Tenda, we carried out our legal expenses and other expenses. We do have claims of clients and employees. These are labor claims that generate a very large volume. On the other side, we have strategic claims.
Now, what is important for Tenda? We have had good results in the mass claims. We have been able to adequately assess what we would need for the year. We came very close to the projections that we made initially. Tenda began 2018 with 10,000 legal claims that were active, and we ended the year with a great reduction.
This shows you the reduction that we had expected for this type of claim. On the other hand, the strategic claims oftentimes end up being more relevant in our results. A strategic claim, therefore, is worth more than the claims of employees and clients. This is what we have seen in the last quarter of 2018. One claim in the last quarter generated an impact of BRL 5 million, and another claim had an impact of BRL 12 million. All of this caused by legacy situations.
In the second quarter, this was due to a partnership. We no longer have partnerships. In the fourth quarter, this was a litigation of BRL 12 million due to tax claims and taxable events and fiscal credit that ended up being incorporated into another company. In practice, therefore, these were impactful events that generated unforeseen impacts.
When we look at our claim portfolio, we do have some claims that could become strategic claims. We cannot have a linear forecast in the legal claims, nor in the strategic claims. When we look at the number of claims, we hope that this will be a number that will be reduced. Another positive element when we look at our statement of accounts refers to the possible losses of the company.
They do not go through the P&L. When we follow up on the possible losses for 2017 to 2018, in 2018, we had BRL 529 million of possible losses. We have now reduced this to BRL 320 million, a reduction of BRL 220 million. This shows a falling curve going forward. But once again, we cannot guarantee this reduction.
Thank you very much, Renan for your answers.
The next question is from Luiz Mauricio Garcia from Bradesco BBI. You may proceed.
Two questions, please. The first, I would like to know your thoughts about your portfolio. Very clearly in the guidance, we see a reduction in margin and that you have already had an impact on margin for Bracket 2 of Minha Casa, Minha Vida. But I would like to know, which is your reading of the developments for Bracket 2.
If you will have a similar pace of sales, of growth, and a recovery of this portfolio to understand exactly how robust it is and how you are going to make provisions for this. Second question, if you could speak about the first quarter in more detail.
Because of the federal government, the expectation was that the entire quarter would be quite weak, but we did see a thrust in February with an improvement in transfers, and the outlook for March seems to show that that impact that we saw in January can be dissipated through February and March, making it possible to eliminate impacts in the quarter. I would like to know what are your thoughts about this for the first quarter, and once again, that resumption in March after what happened in January.
Luiz, thank you for your question. First, what are our thoughts regarding your first question? We are accompanying the evolution of this in 2018. We do have an interesting table for this. We had a growth of 27.9% throughout the year 2017 to 2018, which is higher than the growth of sales. Sales had a growth of 20%. Why did this happen?
What grew most was before the delivery of the key, the growth of 62%. Before delivering the keys compared to after the delivery of the keys, we have a very well-controlled default of 2%- 3% in the company with a stable situation through the years. This is a pró-soluto that we receive quickly during the construction, once again, with a very controlled default. Why did this grow so much throughout 2018? Tenda deployed efforts to lengthen the time between the launch and the beginning of construction.
This gives the customer a greater ability to pay the pró-soluto before receiving the keys. Everything depends on the customer's ability to pay. There is a collateral benefit of increasing the time between the launch and the beginning of a construction, which means we have a lower cash exposure. The longer we wait to begin the work, the greater cash we have.
This reduces our cash exposure or generates cash. This is not a problem for us. After giving the keys, we had a growth of 22%, much closer to our growth in sales, and that minor increase is due to a change in mix. Tenda is working to increase its share in São Paulo. We have been able to do this moderately in 2018. São Paulo is a region that does not act with a Bracket 1.5 , and Bracket 2 has a greater popularity.
We have had a minor increase, but nothing representative. When we look at 2019 as the Bracket 2 will grow more compared to the Bracket 1.5 , we believe there will be a disproportional growth after giving the keys compared to our sales because of this change in mix.
What are we doing with this? Tenda has assessed that the after-sales scheme is a need to complement the 20% of resources that we need from the customer as the maximum is 80% of the value of sale. We have to have the entrance and the amount paid before and after the keys are delivered. This amount is the minimum necessary to complete those 20% of our own resources. We do not want to increase the pró-soluto on this. We only want to receive the necessary amount.
The monetization of the pró-soluto after the keys is not something strategic for the company capital. It has a long duration, and it is not our objective of granting loans. You know our business model. We use this because it is strictly necessary, and we only use it as necessary. We do have a provision model that remains stable throughout 2018.
It began and ended at similar amounts. Default is quite controlled. Default is quite high after receiving the keys, but it has remained stable. For each sale that we carry out, we have a provision for an average default customers after delivering the keys. We do not know the background of the client, and we ensure we do not run any risks. When the customer begins to pay after receiving the keys, I make an adjustment in the provision based on their background.
When we have more than one year of default, the provision is on the full balance of the client. The collection of these amounts, we still see opportunities to improve this. When we compare ourselves with other competitors, we are able to state that we do not have an optimal performance in terms of collection. We have bet on structure, on systems.
All of this is quite recent. We still have not seen the results of all this, but we believe it is a good path to improve the default that we have after delivering the apartments. The default will never be good because this is a very difficult portfolio, a very clean portfolio, and the incentive is for the customer to pay in the long term. But we still think we have a great deal to do in terms of collection.
When we look at the first quarter situation, which is your first question, in fact, the year did begin with several events in terms of the transfers and sales. We had two important events. First of all, there was a change in the program at the end of the year. Because of this, there was a need for adjustment with Caixa Econômica Federal.
And we had the government transition, which of course creates natural hurdles that we saw in other government transitions. In January, the results were poor. There was an improvement in February, and in March, we reached a situation close to normalcy. When we look at the entire quarter, we do see the possibility of having a quarter where in March we recover some of the problems we had in January and February.
Once again, we will get closer to a normal quarter, albeit worse than what we saw in 2018. If everything goes well in March and April, we should have no problems. We are still normalizing the situation. Thank you.
Thank you very much.
We would like to remind you that should you wish to ask a question, please press star one. Our next question is from Guilherme Mendes from JP Morgan.
You may proceed. Good morning. I have a few questions. Could you give us greater visibility in terms of what you are expecting in terms of speed of sales and cash, and what will happen going forward based on the launches per region? A second point that refers to your operation in Goiânia that you initiated at the end of the year. If we could have an update in terms of that new operation. Thank you.
Good morning, Guilherme. Thank you for your questions. When it comes to free cash, the sale had a good free cash design. In 2018, we generated more cash than profit. We had BRL 260 million in cash, and we assess 2018 as being a year with positive events that are very difficult to project going forward. We do not think they will repeat themselves.
We lengthened the time more in 2018 between the sale and the transfer. We also had good results in terms of legacy. The last legacy development was executed at the end of 2017. We once again executed it and monetized it throughout 2018. And we did deploy efforts in terms of fragmented inventory that we were able to sell during the year, which meant that we monetized a significant amount of our legacy.
We enhance the time between the launch and the beginning of a construction, enabling us to have a more robust and mature cash generation. Now, the effect of the legacy, we are almost doing away with our legacy. It is not very representative. What is left will have a more disseminated monetization, and this will reduce our working capital needs, and we do not see any future gains.
The financial model is one that generates cash, but the cash generation levels in the past were extremely high, and we do not believe that these events will repeat themselves. That is to say, because of the lengthening between the transfer and beginning of construction. Going forward, as Tenda has grown approximately 15% in the last few years, we do have the operational capacity to do this, but cash generation should change levels at present.
The model remains, but those exceptional levels we had in the past should drop. When it comes to land acquisition, we had a very good year in terms of land acquisition. We were able to buy significant amounts in the more strategic regions, where we had a scarcity based on our policy, which is to have a land bank for three years of launch.
Three years is what allows us to feel secure to avoid operating risks. In São Paulo, we had significant growth. This is a region with great growth potential, and there is a lack of land bank based on our policy. There are some regions that do not comply with the policy for 2019. In Curitiba and Goiânia, we still do not have that three-year policy. In São Paulo, there is a great deal of expansion of land bank.
This should be a year where we will continue to deploy efforts in these regions to have a better ration of land bank vis-à-vis our launches. We will see if this will be possible or not. When it comes to Goiânia, we have two months of operation. In truth, we launched this market in December. January and February were not normal months because of the change in the program.
What we have observed in this short period of time is that Goiânia is less attractive than Curitiba in terms of speed of sales and demand. Curitiba sells at a higher price and faster compared to Goiânia. Perhaps this is due to the market, especially when we look at the competitor's price. We have mature competitors acting in both regions as comparison, and the situation is different. This is not something that will change the company's strategy.
Our expectation was that Goiânia would have a lower demand. This is a market with sales, but Curitiba had excellent sales. We sold so fast that we almost ran out of our products. Goiânia will not pose the same problem. It seems to be a more normal market as in the Northeast. It is still within what was expected, but with a certain bias in terms of speed of sales and maturity, a term that will be longer compared to our other markets.
Thank you very much.
We would like to remind you that should you wish to ask a question, please press star one, and please wait while we pool our questions. Our next question is from Andre Mazini from Citibank. You may proceed, sir. Mr. Mazini, you may proceed with your question.
Thank you for the call. We're speaking about costs, and you have had certain changes in terms of your gross margin in 2018. Do you see any signs of changes in costs in labor, for example, something that will lead to a greater increase in your cost in 2019?
Thank you. Andre, thank you for the question. Well, the expectation that we gave for gross margin for 2019 is an adjusted margin of 34%-36%, below what we delivered in 2018, 36.3%. What impacts the margin that we are proposing for the year is a reduction in the parameter as Tenda wants to maintain the target market it had last year. We will have to offer discounts to sell to the same clients. The year 2019 will have less impact from our legacy with an adjusted margin.
We don't see any relevant events that could have an impact in 2019 as we had in 2018. On the other hand, we do imagine that there will be a growth of cost because of inflation in 2019. This is different from what has happened up to present with Tenda. We had a nominal increase in construction cost, and in 2018, we were able to absorb the cost of inflation with an improvement in our costs.
We're becoming ever more sophisticated due to two reasons. Every cost enhancement that we do means we have to look for less obvious possibilities of improvement. We have been doing this for the last five years, and a significant change is that since last year, there is significant pressure in the cost of material.
Cement had an increase at the end of 2018, and we think this will be a significant trend that will continue on through 2019. The great challenge, therefore, is how to amortize the impact of the increase of materials for construction at Tenda. We do think these price increases will take place.
When it came to labor for Tenda, we use our own labor mostly in the work sites, and perhaps because of this, we will have more time to absorb any impact in terms of labor. We can live longer with the present-day cost. But of course, if this does happen in the market, it will also have an impact on Tenda. In the medium term, the greater problem is the increase in cost of materials. This seems to be very feasible.
Thank you.
Once again, should you wish to pose a question, please press star one. Please wait while we pool our questions. As there are no more questions, we would like to return the floor to Mr. Renan Sanches for the closing remarks.
Thank you very much for your participation at our conference call. Once again, simply to underscore what we saw in 2018, we were able to have an interesting return of 17% of return on equity in 2018. We paid out capital in an interesting way for the market. In terms of our operations, we see interesting evolutions in speed of sales, in the cost of construction.
2019 goes into that scenario of the change in the program, a change in the government, a more dynamic regulatory scenario. These are challenges that we're very attentive to. Of course, we will let you know what is happening in the company, and let's keep in touch. Thank you very much, and have a good day.
Thank you. The conference call for Tenda ends here. We would like to thank all of you for your participation. Have a good day.