Good morning, and welcome to Tenda's earnings release call for the second quarter of first half of 2018. On today's conference, we have Rodrigo Osmo, 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, please press star zero. Before beginning, we would like to inform you that this conference call will address Tenda's financial results for the second quarter and first half of 2018. Based on information currently available, management 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 can proceed.
Good morning, everyone, and thank you for being with us here at Tenda's second quarter 2018 conference call. Let's start with some remarks about the main aspects of this quarter's earnings and events, and then we will be available to answer your questions. We continue pursuing our objective of becoming the lower income segment home building company that delivers the highest returns to its shareholders. We ended the second quarter 2018 having met significant milestones in this direction.
We begin by highlighting the very positive operational and financial results from the quarter. Net income of BRL 52 million, with 13.6% ROE over the 12 months, reflecting the increasing scalability of the current business model. Feirão da Caixa, a housing sales event promoted by Brazilian mortgage lender Caixa in May, contributed for record net sales of BRL 481 million and pre-sales volume of 33% a quarter.
Our launches have wider distribution in the regions we operate, and the relative importance of Faixa 1.5 projects in our portfolio is improving. Sales have totaled BRL 906 million, representing 52% of the midpoint of the 2018 sales guidance disclosed last April. Another important highlight was savings in construction costs, obtained via the continuous improvement process implemented at our sites. These savings allowed us to compensate or offset the impacts of recent cost increases in raw materials and to reach an adjusted gross margin of 36.5%, above the top-guided range for the year. As such, we understand the need to revise our margin. So revise the guidance for gross margin for 2018, and it will be between 34% and 36%. Regarding our cash position, we had a positive quarter again. Caixa generation of BRL 65 million in this quarter and BRL 120 million in this semester.
One of the main assets was the result of further process reducing lag time from close sale to bank transfer. Caixa generation was important to support the share buyback program as we bought BRL 73 million in shares as of June. Despite share buyback program disbursement, we were able to maintain a BRL 1,657 million cash balance similar to the first quarter. Our share buyback program ended yesterday with 4,489,300 shares repurchased at an average price of BRL 25.18 per share using up all the available regulatory limits.
The execution of the share buyback program aligns with our long-term objective of reaching 0% net debt over shareholders at the final list. I would like to mention that the extraordinary shareholders meeting held on August 9th approved a new management compensation plan, a significant milestone in renewing management's long-term incentives. It is a stock-based plan aligning the interest of shareholders and management.
We believe that all these measures demonstrate once again our search of our objective of being a lower income segment home building company that delivers the highest returns to our shareholders. Once again, thank you very much. We are now available for Q&A.
Thank you. We are now going to start the session of Q&A. To ask a question, please press star one. To remove the question from the panel, star two. Our first question comes from Luiz Mauricio Garcia from Bradesco. Luiz, you can proceed.
Good morning, everyone. Two questions. Talking about Minha Casa Minha Vida program, the continuity of the program and the transition for next year with the new administration. I would like to know your viewpoint and others. This is the first point. The second is amongst. Considering the high profitability of the company, we see gross margin as it has been mentioned. You have a revision of, is that the difference of the G&A? If we imagine a growth within this space, a greater space that you envisage getting in terms of sustainability, how far do you see continuing navigating with this G&A?
Below. We saw based on sales or gross sales and how far you can go. If you can get below that level of 7% of each one of the indicators, we could see it was a bit, G&A, it was a bit below that. How do you see that? How much do you think you can absorb in the growth? How feasible is it?
Hello, Luiz. It is Rodrigo. When we look at the moment of elections, out of the five main candidates, three of them have greater identity with the social programs and left-wing, Haddad, Lula, Ciro, and Marina. There is nothing in their agenda that Minha Casa Minha Vida should not be continued and seen as one of the most successful programs of the recent administrations. Regarding the other two candidates, Bolsonaro and Alckmin, via Abrainc, we have been talking to Alckmin's team and staff, and the feeling we get from them is that there is a perception that Minha Casa Minha Vida is a social program of great success, and that should be maintained during the Alckmin administration.
We haven't yet had access to the Bolsonaro staff, and he has not publicly mentioned anything regarding the program. We do not have the impression that there is either a positive or negative vision on this.
Well, Luiz, good morning. This is Renan. To talk about G&A. We had the G&A above the recurrent because of that revision of the turnover stock option that we had in the first quarter. That made Tenda to have 7.5% of G&A on the launches. That's an indicator that we believe makes sense to follow here. If we compare it to 6% we had last year, the first quarter last year. If we take the non-recurrent effect, we would be very close to what we are, around 6% and 6.5%. That is a percentage we think it makes sense recurrently.
Looking ahead, Tenda has a strategy of having geographical expansion, so we spend more with people, and we anticipate that. We invest in qualified personnel in our operations so that the qualified people with our culture, with proven delivery, can go to new regions. This makes us spend fully before we get the results. However, since the company is growing, even in regions where we have operations, we see that in the numbers, sales, and transfers, we see the effect of additional sales and G&A will have an offset. It would make sense to think about a stable G&A or having some scale, but not so representative. We do believe it is a sustainable level that we are operating today, with some improvement, considering everything works out fine.
Thank you.
Our next question comes from Mr. Enrico Trotta from Itaú BBA.
Thank you. Good morning, and thank you very much for the presentation. I'd like to talk about ROE, gross margin. If we look at the ROE of this past 12 months, the accumulated that has been booked is 14% today. If we annualize the results of the second quarter, it would be around 17%. I know if we look ITR, we had some different reversions there. So you have provision for maintenance, guarantees, provision for terminations.
I'd like to understand where we can assume this ROE should be 17%, considering you have gross margins that are better. Second question. Well, the buyback. You've just completed the buyback program, generating more cash. Maybe you should think about, are you going to think about announcing another buyback or distributing dividends? Would it be possible with the accumulated profit to have some greater dividend in the payout of 25% at the end of the year? Thank you.
Hi, Enrico. Thank you for the questions. Regarding ROE and gross margin, if we annualize the results of the second quarter, the ROE shows a very high level. Our view is that it's not a sustainable number due to two factors. First, because the second quarter is very much benefited by net sales. We have a great deficit in the second quarter, and this potentializes it more, and this is not stable throughout the year. The Feirão da Caixa that we have is something that [Sahail] says event that is only during the second quarter. It's important to annualize the second quarter to imagine the profitability throughout the year.
The other point is that gross margin, we can follow the guidance we have just revised. We are thinking about closing the year between 34% and 36%, and the gross margin of second quarter was well above that. Quite in fact, we see that we will make the gross margin to drop over these quarters are two. First is a new pressure for cost of raw materials. Steel has this prospect of increasing prices about 10%. We are negotiating. Since it is a segment with few players, we believe we can cut very much cost in this area. This participation of people have been growing. In second quarter, 57% of our launches were in the rest, the Faixa 1.5.
We are going to reflect a bit more of the Faixa 1.5, looking at second, third quarter, because the price becomes a bit, well, the 1.5, that is the band of the area. That would be reduced regarding what happened in second quarter. We do not believe that the annualized ROE would be a target we would attain in the midterm.
Just to give you more details on the provision of guarantees to ratify what has been said. We had a reversion on the provision of guarantees, but the fact in terms of our results was actually zero, because this reversion in the provision of guarantees was a counterpart to an extent of that legacy work that we had in terms of contention, which is Assunção. It is within the construction costs. According to the construction cost, I have a reversion there.
That did not generate any gain for Tenda. It was on a par. For buyback, we completed the buyback process. We had BRL 13 million in reserve available. We consumed the whole reserve, buying at a price of BRL 25.18, well below what we have been operating today. We benefited from the not-so-bullish market. From 2Q, we go back to having accumulated profit after many years.
We disclose to you, capital policy in the long term, we intend to get 0% regarding equity. We have -23%. We are a net cash, but this small re-leverage we are going to perform should be performed over time and should not be performed only once. What about how does dividend come in since we have accumulated profit? This will be analyzed regularly. Till the first semester, we only had the option of buyback, so it was quite obvious.
From now on, we have this assessment made on both sides. We are going to check the price of shares that is still undervalued. It makes sense to having a buyback or distributing via dividends. It will be part of our analysis to see what is the best methodology to distribute profit to shareholders. That can be sort of split over time since Tenda, it is an operation that is generating cash. It is quite likely that we have different situations regarding shareholders in the forthcoming quarters.
Perfect, Renan. Thank you. Have a good day.
Our next question comes from Helena Montan from Santander. Ms. Montan, please proceed.
Good morning. I have actually two questions, also regarding the geographical expansion that you are performing. You mentioned that the trend in the next year is to gradually have an expansion to new regions.
I'd like to understand whether you have a number as to how many regions you intend to reach, or how much of this is mapped out. The second question would be on the approved plan of stock options, if you can give some more details. The compensation for management and the board, the differences, how this is compared. Thank you.
Hi, Helena. Thank you for the questions. Regarding geographical expansion, we have a prospect of actually advancing gradually. We have operational capacity to grow one region a year. This is what we are trying to carry out 2018. We haven't grown the operations yet. We have two operations today that have possibility of growth. We're going to select one of them to attempt to grow in the second term, and from 2019 onwards, one region a year. The math we did was based on demographics.
There are three regions that allow Tenda to operate based on its current business model. Three more in addition to the seven where we are. Because Tenda operates in a model that I cannot stop doing my work, because I have a minimum demand, and that only works in large metropolitan regions. So we still have a long way, many years as a step. We've been successful, one region a year. We have a long way to go in terms of geographical expansion.
In terms of stock option, we approved at the last general meeting in August, a plan of compensation for management and the board as well. This is an important milestone for Tenda stock option that was being ahead. In effect, it will be maturing in 2019, so we would lose the cost of exit of the management. That was important.
The plan was discussed by the board with Korn Ferry for eight months to get to the proposal that was brought to shareholders and approved on August 9, and it works in the following way. It's a performance share for the managers, for the management. In other words, we have a share target that we are entitled, and depending on the performance of three items, we multiply the number of shares by zero or even 150%. It's a range we can exceed. It can be nothing or 150% of the target defined. For the board, it is a fixed grant with no performance target linked to it. What about the performance goals that management has? So we assess in the practice, the appreciation has three items.
We have the capital cost that we take, and we have a second, we have a benchmark in this industry, and we are at 100. Then that's the one we decided to follow. So we have a valuation that is representative considering the three items. We multiply the number of shares we received by 150% if we have an appreciation regarding the three items. We get 0% if we don't.
So you have a matrix in the middle for other scenarios. The grant is given entirely in three years, so it has an axis of three years. So we have a plan that is 25% practically the same. The idea is to have year and day concessions of this plan for the management, so that this long-term incentive is always renewed, and we don't need to have this concern anymore that we had in the last one.
We are getting to the vertex, and we were worried about exiting. This is good. For the board, the grant should be granted at the beginning of the term, and it actually ends at the end of the term. We want the board to have the same liquidity terms as management. We have this. The board has two years and one more of lockup. They can actually realize that in the same period that managers have. In the case of the board, the plan represents less than half of the total compensation. In other words, the great compensation of the board is still fixed. They are maintained in terms of compensation, and we managed not to leverage too much the board plan. First, it is a grant, not a stock option, so it could be all the money.
The grant does not have that possibility of being too leveraged, and the board does not have the performance goals as management has. We have a long-term incentive for the board, along with shareholders, but they do not have such volatility or such high exposure of risk to maintain a fiduciary duty to keep it intact. It was approved on 9th of August . October, we should have the first grant of shares. We should have a line with the board in the next weeks, and then we will have new grants in the different sizes, depending on the size of the company, of the board, and the value. The amount may change, vary a bit because of that, based on that.
Perfect. Thank you very much. That is clear.
Our next question comes from Mr. Luis Tacchini from Credit Suisse. Mr. Tacchini, you may proceed.
Good morning, everyone. I have two questions as well. First, regarding the outlook of cash generation to you. You mentioned that you being able to deliver cash above net profit, but the level of turnover capital is quite tight. I would like to see if you see any additional level from now on, or if it makes sense, cash generation a bit below that. That is the first question. I would like to understand the processes in terms of losses. We had an agreement of BRL 6 million to finish that. We happen to have BRL 430 million of demand, legal demand, that is possible. I would like you to mention that a bit. If you have an approach for agreement, if you have any prospects of getting to an agreement on this level. Any comments on this would be quite interesting.
Hello, Luis. Thank you for the question. Regarding cash generation, actually, we had a new gain of turnover capital with this quarter reduction between the sale time and transfer, and that was important to us. From now on, we are not imagining new gains as turnover capital. Process between sale and transfer is optimized, and we have an increase by region. When you see regional, they are similar. We have few benchmarks to pursue. We have quite a few things, and in terms of stock, we have that quite optimized. We are actually maximizing our works. Our production work allows us to make these changes, so we do not imagine having new gains in the line of stock. And line of land, where we are operating with 30% of swap and 70% cash, that is what makes sense if we consider the market we operate in.
So the level of Tenda working capital makes sense for our future operations, unless there is something that we cannot see at the moment. We still expect to have positive cash generations, but possibly less than what we have seen so far with the gains of working capital, the sales, as, of course, we generate. Tenda has a cash generation, so our working capital would be closer to net profit.
But on the other hand, we assume growth. So we have all this debate of structure, but there is also debate of acquiring projects in new markets, and that makes the consumption slightly different from the usual. This should not make the operation to have a very negative balance in terms of cash generation. We expect Tenda to be a cash generator, but below the level we have been running so far.
Looking at the contingent and liabilities that is possible for the company. We had an agreement of the second largest with a process or proceeding of BRL 100 million. We actually managed to complete it and quite successfully. And from now on, we have another one, which was an expression of 2010, a tax action that has been running for a long time. We have not had any return in this aspect. Our lawyer assesses the case of BRL 200 million, that is possible. No value as likely. So it is still at the court. This case has not been moving on. Regarding other actions, they are quite much smaller. We do not have major legal actions to think about an agreement.
On the other hand, Tenda, since 2016, started a policy of agreements by the legal demand in an intelligent way that helps us close these actions faster at smaller amounts than they would be actually decided upon in the future. So we have been reducing the number of actions within the company over the past two years. The number of pending legal actions has dropped 20%. This is a reflection of our efforts in anticipating this cash generation. On the other hand, gaining in P&L when we look at a more broader spectrum, and we still keep on making those agreements. As great part of these legal actions are related to our legacy that we had deadlines, so bankruptcy of undertakers and also developers. This has no longer happened in the current business.
In addition to important agreements for this regression, the time, as it goes by, makes the entry of new legal actions to be reduced. The past four years, we have delivered the most important legacy. So there is a trend of reduction on legal actions, and we just do not see major legal actions that may have a great effect on the P&L, as was the case that happened today, now in the second quarter.
Okay. Thank you. Have a good day.
I would like to remind you that if you wish to ask a question, just press star one. Wait while we connect the next question. Our next question comes from Mr. Marcelo Motta from JP Morgan. Mr. Motta, please proceed.
Good morning. I have two questions as well. The first, I would like you to comment on what would be the drivers to accelerate the re-leverage 0% of net debt. What is the situation, the macroeconomic environment? What can be monitored so that we see dividends or buyback? The second question, if you could comment on the outlook of the FGTS, so the severance pay as well, second, fourth term is a bit more agitated, so could this cause some kind of hindrance to the program that is being sought for the second term of the year? Thank you.
Hello, Motta. Thank you for the question. Regarding leverage, how have we defined this as process in the company? Tenda imagines paying the minimum every term as of next year, as soon as we close our fiscal year and approve our accounts. Then when we draft our business plan, we evaluate whether Tenda can distribute an excess of capital.
This will depend on what we see in terms of capital requirements for the future years, how quickly we can expand to other markets, if this will make the balance sheet of Tenda to have more or less cash generation. Then we decide whether we have excess capital, if we can actually get debt and the market to maintain cash high, if the political scenario, post-elections, if we have some great concern that makes us keep the money in-house. So the idea is that annually we should carry out the plan late in the year, November, December. And we should then define that we are confident and we can actually have a differentiated distributions of capital considering operations, politics, and the capital market. If we make this decision outside this time, we assess that we do not have everything on our table.
So when we make the business plans, we have to have everything clear. How much we need for geographical expansion, current alterations, the situation, et cetera. So it makes sense to discuss everything together. So the three elements. So operational elements, capital requirements of the company, political, economic aspects that we imagine for the future, and the capital market situation for incurring new debt. Based on that, we assess whether we are mature enough to think about additional disbursements of capital. Then we will talk about the FGTS.
Okay. Hi, Motta. I believe it is possible for us to have some operational problems regarding FGTS in the second term. Last year, we suffered with a reallocation of FGTS between states, and there was a question whether budget was sufficient or not. And there was the difficulty of Basileia and Caixa, and so I think that is not an issue, only the FGTS, the workers' compensation fund. But the question of budget of the workers' compensation fund may be a problem. So the contract for this year is very much aligned regarding last year.
To give you an idea, until July last year, we had contracted BRL 33.5 billion in funding using the FGTS. Up to now, we have close to BRL 33 billion by July. Very much in line. And last year, this level led to some operational stress at year-end. In addition, there is also the. We have consumption speed has been greater than last year, which was to be expected, because last year, well, we had the Faixa 1.5, became operational in April, May 2017.
This year, it started operational from the beginning of the year. Tenda does not signal that we are going to have lack of subsidies, but if the speed of consumption and subsidies increases regarding the first seven months of the year, we may have a bit of a headache. But regarding allocation of funding of FGTS, what demands some attention of ours is that this is an election year, and some president will be elected in late October. A discussion of resource allocation at year-end, we will have to make with an administration that is leaving. There are always conversations that have some legal components. It is important to monitor that and to see the allocations. If they are necessary, they should be made. Another element, a new one that should add some operational tension on our part is Caixa Econômica strike. Last year, we had no strike.
The employees made an agreement that was two years. In 2017, there was no trade union or collective bargaining. This year, there will be a strike, and it may be a heavy one, and it may not be a simple one. Among other things, because the management of Caixa has significantly meddled the health insurance of employees. That was important and necessary so that they could deliver a Basileia Accord. It is going to be more exciting, and this year we will actually be facing some emotions as well.
Thank you, Rodrigo.
Once again, we would like to remind you that if you want to ask a question, press star one. Please wait while we collect the next question. Once again, to ask questions, press star one. Since there are no more questions, we give the floor back to the speakers for final remarks.
I would like to thank everyone for following Tenda's results conference call for the questions. We are here available at the investor relations. Rodrigo mentioned something that you want to be aware that the first term was very positive for the company in operational terms. We had no hiccups, no problems that actually impaired our operations.
Second term or second semester, we have other prospects, strikes, workers compensation, elections. But Tenda in-house is very much focused in delivering the best results possible and viewing a scenario outwards, doing the best things we can do with the best connections we have. Thank you very much. Let us move on for the second term. Thank you very much and best regards.
The conference call, Tenda, is closed. We thank the participation of you all and have a good day.