Good morning, and welcome to the earnings conference call for the first quarter 2018 for Tenda. We have with us today Rodrigo Osmo, the company CEO, and Renan Sanches, the CFO and IRO. We would like to inform you that this conference call is being recorded, and that all participants will be in listen-only mode during the presentation. Ensuing this, we will go on to the question and answer session. Should you require any help, please press star zero. Before we begin, we would like to inform you that this conference call refers to the financial results for Tenda for the first quarter 2018, and is based on information currently available. The information involves risks and uncertainties, and of course may not materialize in the future. Any economic and financial changes and market situation could impact the results of the company. Mr. Sanches, you may proceed.
A good morning to everyone, and thank you for being with us today for the Tenda earnings call for the first quarter 2018. We're going to begin with the key highlights for the quarter, and right after that, Osmo and myself will be available to answer your questions. We had a first quarter of 2018 with sound results. Net pre-sales totaled BRL 424 million, up 25% vis-à-vis the first quarter of 2017, validating Tenda's product effectiveness and acceptance in our target market and in line with full year guidance. We continue implementing our schedule for launches in the marketplaces where we operate. We have 41 works under construction, all of them executing on schedule. Financially speaking, Tenda continues delivering very positive results. Adjusted EBITDA grew 84% year-on-year, and adjusted gross margin was 35%, in line with our guidance.
Net income in the last 12 months increased 75% to BRL 124 million, while return on equity had an expansion of 4 percentage points. We would like to highlight a subsequent event at the end of the quarter that was important to our strategic positioning. In April 2018, we delivered the Colibri project, the first one with an elevator under the current Tenda business model. This project, launched in December 2016, located in São Paulo, was aimed at the feasibility of a building with elevators with the same total cost of production and same sales price that is still targeting customers of Minha Casa, Minha Vida. Additionally, it had to be a product that maintained the same building process using the aluminum mold technology, allowing for the continuity between our projects. We were very pleased to deliver the Colibri project and confirm that the pilot project fulfilled its objective.
We built it with a cost similar to our projects without elevators and sold it to the same customer profile without increasing prices. The works with an elevator allow us to have a greater number of units on the same land, allowing greater flexibility in the acquisition of land bank and allowing us to work in smaller plots that would be usual for Tenda, which will set us aside in the metropolitan area where the availability of land is scarce. This is one of the growth strategies for the region of São Paulo, our more profitable region, and that has an unfilled demand for housing. We're quite enthusiastic with this new front in which the company is working. This quarter, we reverted the drop of transfers that we saw last quarter due to timely problems with Caixa Econômica.
We had an increase of 29% in PSV compared to the last quarter of 2014, reaching BRL 413 million. Once again, our work with Caixa is stable and normal. This strong performance of transfers has an impact on our cash flow, which was also benefited from the inflow deriving from the issue of real estate receivable certificates at year-end. This was our first offering into the capital markets after the company's IPO, attracting over 6,000 individual investors, enabling a funding of BRL 266 million. Thus, our cash ended the quarter at BRL 660 million. Deducted from our gross debt, this resulted in an adjusted negative net debt of BRL 283 million, representing a negative net debt shareholders' equity ratio of 23%. Due to the increasing deleveraging of the company and the solid cash balance, the measurement of this index was already being discussed at the board of directors.
Therefore, as a result of this, we announce that the company will pursue this goal in the long run, sustaining its leverage close to 0% with a fluctuation of 10% upwards or downwards. This metric supported the board of directors led to the decision to approve our share buyback in early April. These shares can be canceled or used to exercise options within the scope of the stock option plan. We held our annual and extraordinary shareholders meeting that approved to conform the company's bylaws to the B3 Novo Mercado rules to alter the composition of the current finance committee to transform it into an audit committee, anticipating the requirement of new market rules. We also anticipated the creation of a fiscal council. This is one of the foundations of our commitment to the shareholders. Lastly, this quarter, we adopted the CPC 48 IFRS 9 accounting standards.
Our financial statements are already adjusted to these changes. This adjustment did not have any relevant impact on our financial statements since the metrics had been already approved concerning provision for credit risk. I would like to conclude these remarks by reminding you that on May 4 20 18, we will celebrate our year of listing in the B3. Our results reflect our collective efforts, commitment, simplicity, and efficiency, all of which is being recognized by our clients. During this year of listing, our share price has increased more than threefold. We will remain committed to the delivery of solid results and to the expansion of Tenda's current business model, thus allowing us to reach our objective of becoming Brazil's low-income segment company that delivers the best return to its shareholders. Once again, thank you very much, and we are at your entire disposal for questions and answers.
Once again, we are beginning our question-and-answer session. Should you wish to pose a question, please press star one. Our first question is from Alex Ferraz from Itaú BBA.
Good morning, and thank you for the presentation. I have two questions. The first refers to the Project Colibri. I would like to understand the growth margin that you receive from this project, and how much of this land bank that you mentioned could be used for this type of project as part of the company PSV, which is the ratio that buildings with elevator would occupy. When it comes to your capital structure and you're going to begin to offer us guidance, are you going to continue with this strong thrust towards cash generation? I believe that at the end of the year, you should announce an announcement of capital within those boundaries of 0%- 10% of net debt over shareholders' equity. I would like to have your vision for the long term.
Alex, thank you for your question. This is Renan speaking. We begin to speak about the Colibri project, which is a development with a very high margin, but not because it was a building with an elevator, but because it was in São Paulo. Historically, the growth margin is always the highest in our operations, 5 percentage points above the average for Brazil. Colibri offered us margins of 43%, 44%, which is a very common thing in São Paulo. Therefore, this is not an outlier for the region.
When it comes to our land bank, most of the acquisitions that we carried out last year were part of this new model for buildings with elevators for the region of São Paulo. We have also increased the units in corporations that we had purchased before to now begin working with this new model with an elevator included. The land bank in São Paulo, once again, it will fully conform with this new model. 80% of the São Paulo land banks will be for buildings with elevators that can reach 10 floors. If we speak about figures, we have BRL 1.9 billion in PSV and land bank for this model with the elevator. This represents 28% of Tenda's total land bank.
When it comes to our capital structure in a model that generates cash, it is probable that we will have a greater deleveraging, and we will have to adopt some measures to conform with the boundaries at our long term of minus 0%- 10% deleveraging. A positive situation this year is accrued liabilities in the first quarter. They stood at BRL 2 million, which means that we have invested a large part of it in the first quarter. And through the guidance that we propose, we should have an accrued profit at the end of the exercise that will be significant so that we can assess a dividend payout. Perhaps it will not be necessary to reduce capital as Tenda will not deliver this deleveraging in the short term. And this might compromise the cash in the company.
We are going to assess activities to come very close to that capital structure that we are disclosing, but we do not see any need of reaching it already in 2018. It should be something gradual that we will carry out through time.
Thank you very much, Alex, for your answer. Our next question comes from Mr. Luiz Maurício Garcia from Bradesco Bank. You may proceed, Luiz.
A good morning to all of you. First of all, regarding the program, Minha Casa, Minha Vida, we saw that the government wanted to speed up this program, especially in Faixa 1. But basically, Faixa 1 is somewhat burdensome, and we see that most are migrating to the 1.5 Faixa.
Which is this dynamic, and do you believe that this attempt of the government to increase the Faixa 1 construction could benefit the middle range, considering the amount that this would cost the government budget? The second question refers to the verticalization of projects in São Paulo. You are quite well equipped when it comes to the land bank. Which is your opinion of density? Of course, all of this will depend on having a good absorption, but how feasible would this be in other regions, perhaps in other areas? I understand that this kind of project will change your expectations, considering the size of the company, the optimal size of the company. Once again, which would be your opinion in terms of this balance and size, considering this new project you have launched?
Luiz, this is Rodrigo. We have had a great deal of rumors in terms of the changes of the ranges of Minha Casa, Minha Vida for 2018-2020. We hope that the FAR will be able to increase the number of units produced in level of Faixa 1 . We have also heard about increasing the goal of the Faixa 1.5, having perhaps a change of mix of contribution between the federal government and the government housing program, perhaps changing to higher ranges. Quite frankly, the most probable scenario in our vision is that nothing will change.
The goal was set forth by the government at the beginning of the year, and we believe that it will be maintained, reaffirmed, and that these conversations had a great deal of weakness in the journals, perhaps based on studies carried out by some technicians who were probing out their ideas. As we see it at present, the situation at present will probably not change. Evidently, the political context changes at incredible speed, but we believe this will be the context at present.
Hello, Luiz. This is Renan once again. When it comes to the verticalization and how we consider entering new metropolitan regions, the movement in São Paulo was extremely obvious. When we thought of having buildings with elevators, we decided to have buildings that would operate in a very similar way with those T+4s. They should sell in a store with 40 square meters and the same technical specifications, and that the production would be similar with the aluminum mold structuring to allow for continuance. The buildings with elevator will be prepared in special units at a plant. I will produce at least 1,000 of these units every year.
With this logic, it will become ever more difficult to enter cities that have 1,500 or more units. We would have to have a plant of T+4 and a plant for apartments with an elevator. There is a limit of 1,500- 2,500 units for Tenda. The only region with greater potential is São Paulo, where we can coexist with a T+4 producing more units and producing more than 1,000 units of building with elevators. This condition would be possible for other cities, but the movement is more complicated, and the potential will be lower than it is in São Paulo. To answer the next question, which is the size of the company that we foresee for the future. We have the operational goal of growing 10%-15% per year going forward, beginning in 2018.
The guidance, once again, is in accordance with this. We believe we will have 13% net sales vis-à-vis what we delivered in 2017. What we have already proposed is that this increase of 10%-15% would mainly come from São Paulo in the next three years. We are counting upon the fact that Faixa 2 with an elevator will help us to grow during the next three years, especially in São Paulo. After the fourth year, this growth of 10%-15% will be possible, but we will be anchored in new regions.
The intention is to enter a new region every year. In practice, what rage 2 allows us is to ensure greater quality that would enable us to grow 10%-15% in the next three years with a focus on São Paulo. That is our more profitable region. We see that this operation might grow more than we had forecast when we only had T+4. It will give us greater security, but it will not increase our capacity to increase. Well, there will be an increase in capacity of 10%-15%, of course.
Thank you very much. We would like to remind you that should you have a question, please press star one. Our next question comes from Mr. Marcelo Motta from the JP Morgan Bank. You may proceed, sir.
I have two questions still referring to the projects with elevators and Colibri. The company has obtained a very good return and very sound margins. What is happening with your capital cycle? Perhaps you will have to work with larger land banks or have to deliver more. Will this generate a great deal of complexity for the company? The second question is something that we read in the release, the issue of the stock options going forward. This line of expenses will go back to the levels that we saw last year or will these increase? Which would be your recurring G&A going forward?
Marcelo, this is Rodrigo. With regard to Faixa 2 with an elevator, the capital expense will be the same because the project has exactly the same size. Our average at present is 300 units, and Faixa 2 with an elevator would be very similar. The execution time is also quite similar. There will be no difference. In truth, we continue to produce day after day. There is no difference in the term of delivery of the work or the cost of land. The cost of land in São Paulo is very representative with an equivalent potential face value.
In São Paulo, we tend to purchase land paying in cash. Therefore, the cycle of our capital will not be a problem. When it comes to complexity, there is no complexity if we base ourselves on three fields of business. Prospection, for example, everything remains the same. In sales, we are selling the same to the same target audience from the same store using the same channels and the same market, the same Faixa 2 product. There will be no additional complexity. Where we can have additional complexity is in the execution of the work. We have additional processes, especially with the installment of the elevator, but the logistic of the work site also will be quite different. The relationship with the space available on the land floor, the storage of materials, and movement is lower per apartment than in the T+4.
We have tested several logistic alternatives in Colibri, many of which proved to be successful. We are attempting to enhance our other alternatives as part of our continuous improvement in quality. This is nothing that will concern us or put at risk the work. When it comes to the stock option, we had an extraordinary expense of BRL 9 million, but it is very similar to what we had in 2014. It is a one-off item. The results, we will not go back to our original levels simply because the 2014 plan had been priced at a very low level. The company was not worth very much. It was the 2014 Tenda. Through the years, we now have a company that is worth much more. So we are far from reaching those BRL 9 million every quarter as an extraordinary expense this quarter.
We are going to be operating somewhat above what we were operating in the past. At the general ordinary assembly held this year, we have already approved a provision for a new stock option plan for BRL 6 million of results this year. This gives you an idea of the relative size of the plan and the old plan that had BRL 1.5 or BRL 2 million as expense per year. Therefore, this is more tangible and shows you what we can expect going forward in 2018.
Thank you very much. Our next question comes from Ms. Georgia Jorge from Banco do Brasil. You may proceed, ma'am.
Hey, good morning. My question once again refers to Project Colibri. I would like to know if you already have the approval for future verticalized projects in the coming quarters, or if you are only going to approve them now, and we will be able to expect these projects only in the medium term in São Paulo.
Thank you for your question, Georgia. We do have projects approved with an elevator in São Paulo, and during the second semester of last year, we launched some projects based on this model. Going forward, 80% of what we launch in São Paulo will be the model with the elevator. This has become part of our daily routine. We buy land bank, and we prepare projects thinking of this. We waited for the cycle to be concluded and to deliver the development to ensure that it would be a success, but we have been operating with this for more than a year, and it is part of our day-to-day work.
Thank you.
Thank you very much. Once again, should you wish to pose a question, please press star one. Please wait while we pull our questions. Please wait while we pull our questions. Our next question is from Hernan Genta from Santander. You may proceed, sir.
Hey, good morning to all of you. My question refers to the BRL 12 million expense to reinforce your legacy development. If you could give me greater detail if there will be other expenses regarding those developments or similar projects in the coming quarters. Is this a one-off item only? Thank you.
In fact, we did have, at the end of 2017, the payment of most of the developments in Belo Horizonte. Because of this, Tenda assessed which would be the best alternative to resolve this. We decided to use a cannon and avoid problems, so this will not happen again. We don't expect to have something of that magnitude in the future. This development, called Assunção, has a building of more than 40 m of height. It is highly atypical, and it is the last work that we delivered as part of our legacy.
It underwent heavy rainfalls, and we did not know how this would behave. Most of our developments do not have a very high contention, nothing similar to what we had in Assunção. They have gone through great rainfalls during several summers, and nothing of that sort happened. We hope and we expect that this was something highly specific that will not happen in any other development. The way we're dealing with this issue is a very robust way.
Thank you very much.
Our next question comes from Alexandre from CL4 Capital. You may proceed, sir.
Good morning, Rodrigo, Renan, and whoever else is there. Congratulations for your results. I have two questions that I would like to discuss with you. If you could speak more about the price of the land bank that you are acquiring, specifically in the city of São Paulo. We see that there is an attempt to increase competition. In truth, this did not materialize. If you could tell us what is truly happening with the price of land bank, especially in São Paulo. If you could give us more color.
We saw the recent balance of Caixa Econômica with a good tendency when it comes to doubtful payments. If you could link this topic to the problem of doubtful payers, you now have a very mature backlog, and as we mentioned with Rodrigo, there still was a great deal to do. If you have any novelty, I would love to hear about it.
Hello, Alexandre, and thank you for your questions. When it comes to the price of land bank, we are foreseeing stability since 2016- 2017 and in 2018 up to present. If we focus specifically in São Paulo, we have begun to have more competition because we're going into prime areas. Because of the elevator, we're negotiating a land bank negotiated by Faixa 3, and therefore, we're facing much greater competition.
Nevertheless, this has not had any impact on the percentage of land bank over PSV for the company. We have had highly competitive values. We pay cash, although we pay in a prolonged fashion. Of course, we are highly competitive in our proposals for land bank. We haven't felt any increase compared to what we did in previous years. In terms of the balance, the doubtful payment for housing has been reduced significantly. This does not refer only to Minha Casa, Minha Vida. This is part, of course, of developments, and we have also had a reduction in this field. We never think that doubtful payers, going forward, will be a problem for the company. We're carrying out a very stringent control. Once again, these doubtful payers will not become a problem. At least the figures in the balance shows you this.
Now, how do we deal with the situation of collection in the company? We have a stability in the percentage of doubtful payers. Before we deliver keys, although our backlog has matured, we have taken longer to deliver, and we have been able to maintain a level of default that is very similar to what we had last year. We do expect some enhancements due to the collection system that you mentioned. We have not had any gain from the system. The system is operating, but all the initiatives will begin now. We do not know exactly which is a positive effect that this will bring to the company. We believe that the collection area can generate a great deal of value for the company.
We have a provision for default for any new client, and if we have news on the improvement of historical default, this will have an impact on the profit and loss for the company.
Thank you very much.
Once again, should you wish to pose a question, please press one. Please wait while we pull our questions. Please wait while we pull our questions. We request that you please wait while we pull our questions. As there are no further questions, I will now return the floor to the speakers for their closing remarks.
Thank you once again for participating in this conference call. Tenda is at a very interesting operational moment, and those who follow up on our figures during the years will have observed our evolution. There is a great deal of work to be done in-house. We also follow up on the regulatory environment. There is a great deal to do. We hope that this will be a very positive year despite the volatility. We would like to thank you once again for your participation. Have a good day.
The Tenda conference call ends here. We would like to thank you for your participation.