Good morning, and welcome to Tenda's earnings release call for the fourth quarter and full year of 2017. In today's conference call, 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 listening- only mode during presentation. Afterwards, we will hold a Q&A 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 in the fourth quarter and full year of 2017 and are based on information currently available. Management statements involve risks, uncertainties and may reference to future events. Any changes in macroeconomic policy or in legislation and other operating results may affect the company's performance. Please, Mr. Osmo, you can proceed.
Good morning, everyone, and thank you for joining us in our fourth quarter and full year 2017 results conference call. This is Renan's first call as a CFO. I would like to take the opportunity and welcome Renan. We are very happy for having selected a homegrown talent to hold such relevant positions as CFO. Tenda needs a CFO focused on regaining value in the long run, someone who keeps a firm grip on good fight with entrepreneurship grounded on realism and analysis. Someone who thinks as a partner and embodies our culture. Renan has these outstanding characteristics. He will be essential for us to achieve our vision of becoming a company in the residential estate market to deliver the best return to its shareholders. I will now turn over to Renan.
Good morning, everyone, and thank you, Rodrigo. Well, let's start discussing the last quarter of 2017, which closed with Tenda achieving significant milestones. The highlight was the company stock exchange listing in May, allowing us to operate again as an independent company. From the operational and financial standpoints, we delivered solid results deriving from new business model and the expansion first initiated in 2013. The consistent new model allowed us to maintain steady growth. Launches increased fivefold over these five years, from BRL 339 million in 2013 to BRL 1.7 billion in 2017. In 2017, we registered 26% growth, with net sales rate of 57% in 2017 and 27% in the fourth quarter.
An accelerated construction cycle sustained by aluminum mold technology allowed us to deliver all projects launched since 2017. The confidence in our business model also allowed us to launch our first geographic expansion under the new model, our operation in Curitiba, which we launched in the fourth quarter. Although highly resilient, our target market faced operational challenges in the second half of the year regarding the capacity of Caixa Econômica Federal to continue to play its role as a funding body and in this segment. This caused us to anticipate a few launches in the previous quarter, as mentioned in our last conference call. This situation has now been solved, and as of November, we saw a gradual stabilization, allowing us to generate BRL 75 million cash in the fourth quarter and BRL 239 million in 2017.
Another highlight in 2017 was our land banks. The good volume of land acquisition in 2017 allows us to maintain our business plan over the next years. We acquired BRL 3.9 billion of land, and we ended the year with a final land bank position of BRL 6.7 billion, 50% higher than the final land bank of 2016. Efficient transfers and cash generation provided a very comfortable position and a solid capital structure. Our cash at the end of December, BRL 498 million, was more than enough to cover our total debt of BRL 270 million. This positions us as one of the most unleveraged companies in the real estate market.
In recognition of this solid capital structure, the risk rating agency S&P recently assigned Tenda an A+ corporate rating. Our operational performance and outstanding growth results have been acknowledged by the capital markets. During these seven months since our listing, our shares appreciated 146% with an average daily trading volume of BRL 8 million. This liquidity allowed our shares to be included in theoretical portfolios of the Brazilian stock index, the small cap index, and the construction, real estate, and industrial sector indexes, besides the corporate governance index.
Due to business volume growth and gross margins gains deriving from higher productivity at the construction sites, our net income totaled BRL 107 million in 2017, resulting in an ROE of 9.7%, 4.4% points higher than in 2016. Despite a solid operational performance, our profitability is still impacted by legacy projects contingencies. We face several losses in 2017, a trend which should revert in the medium term with a more extensive reduction in 2019 as we continue to build the pillars which will sustain our vision of becoming the low-income segment company that delivers the best return to its shareholders. Thank you. Now we are available to answer your question.
Now we have the Q&A session. To ask a question, please press star one. To remove the question off the list, press star two. Our first question comes from Victor Tapia, Bradesco BBI. You can continue.
Good morning. Good morning, Rodrigo, and thank you for the opportunity of asking a question. I have two questions here. I would like to learn more about the two initial months of this year. Last year it was very strong, and I would like to know how this went this year. What are your expectations for this year? The second point that I wanted to know about is we have been in Brasília and talked to some government representatives, and they are focused on the quality of the program, which peaked last year in the physical person prohibition law. How do you face this competition?
Hello, Victor. Thank you for your question. Regarding January and February 2017, in terms of Caixa Econômica, as of the end of December 2017, we have been working with corporate individuals. Throughout the last two months, this trend has been confirmed. From the operational point of view, we have no problem, and there is also no problems in working with these corporate individuals. So we have been working as we did last year. Regarding sales and repairs of money, we had no problem in the beginning of this year. The first quarter is not a strong quarter because February is a short month and there are few working days in this month. This trend follows the trend of the last years. But when you compare them between the years, we have a higher projection of sales due to the offers that we have on the market.
We have a lot of launches in the three areas we are active in, especially now in Curitiba, and we are present in different areas, and this makes selling easier. What we believe will happen in 2018 in terms of demand is positive. The question that we will face is the regulatory scenario. Up to now, everything is fine. We have the corporate individuals, the repasses, and Basel. With the election in October, we need to focus on the scenario and follow it closely. Rodrigo will talk about the second item.
Thank you. Good morning, Victor. The issue with the private individuals in the areas we are working in, we did not have a problem with the private individuals because these sites, they are more functional, where your land banks involve a higher flow of money. The penetration of our label, our brand, is higher. So we tend to work with established companies. The importance of the decrease of these private individuals in Minha Casa, Minha Vida is associated with the resources of the FGTS. Because these companies, there are 40,000 units of Minha Casa, Minha Vida. When their representativity decreases, what happens is that the trend tends to be positive. We see this under a positive light, but not because of local competition, but because of FGTS resources.
The next question is from Enrico Trotta from Itaú BBA.
Good morning. I have two questions. The first one is associated with the profit margin. When we look at it is still very high, 48%, 49%. I would like to understand what we should expect or what do you expect as a profit margin in 2018. When we look at the land bank, what is the viability of the gross margin that you have been using to purchase, to acquire these lands? In terms of gross margin, the gross margin showed a good behavior and behaved better than we expected. Regarding the provisions, Renan mentioned that this line peaked in 2017 because of delegated deliveries, and I would like to understand how this will work in 2018. I believe that there will be a drop up to 2019. So could you elaborate on that?
Thank you, Enrico. Thank you for your question. In terms of gross margin, Tenda had the gross margin of 2017, which was very high. We believe that our average will be below what we presented. We had 17%. We expect that Tenda will normalize its gross margin between 32% and 34%, but we believe this will happen in a gradual fashion. So throughout 2018, we will still expect gross margin higher than 34% throughout the semester. But as of 2019, we should be closer to the range that we already mentioned. In practice, what happened is what happened in the fourth quarter when compared to the third quarter, is that we had a drop of 2% in gross margin, and it was an exceptional quarter. In the fourth quarter, we had 37%.
This reduction happened because the third quarter was exceptional. We had savings on construction sites, and this did not happen in the fourth quarter. In the fourth quarter, we also started our last legacy construction, which had been stopped for 40 years. This construction site has a lower margin than the models in the new business model. We will have the negative impact of this site on our projections. We will not suffer on the liquid profits, on the net profits, but we must consider it and its impact. This impact was 0.5% of the gross margin. We had contingencies. We had a peak in 2017 because of two reasons. Because of non-recurrent adjustments of BRL 35 million and many lawsuits evolved to a decision. The trend that we see is that we will have a reduction in the lawsuits.
When we evaluate the open lawsuits, Tenda reduced them from 10,000 processes to 9,000 processes in the beginning of 2018. We will have to wait to see an improvement. But this tendency to gradually reduce the lawsuits will result in a long-term profitability. For 2018, we expect numbers similar to 2017, excluding the non-recurrent effects. We do not expect any of these in 2018, so we can expect a similar volume to 2017. In 2019, we will see a gradual profit, a slow but gradual profit. The most important part here is the phasing out of legacy. The new model also has contingencies, but the contingencies are lower. There is less volume of contingencies in the new model because in the legacy, the problem was associated with the time of construction, with the deadline of construction.
This is not happening in the new business model. Also we had problems with labor law. In this new model, we work with the vertical aspect of the construction site. So the effect of contingency that we had and the legacy will not happen in the new model. Tenda does not have a perfect model about the contingency in five years period because we have a small history of contingencies in the new model. They take a long time to be evaluated and to reach a final decision. So we believe that we need five years in order to project how contingencies will behave in the future. But the first signs are very positive. We have had fewer lawsuits, and they were smaller, and we had a higher rate of success. In all aspects, this new model seems to be more profitable than the legacy model.
Thank you, Renan.
Our next question is from Marcelo Motta, JP Morgan.
I would like to learn about cash generation. I would like to learn more about land acquisition. 2017 was an intensive year in land of acquisition. Regarding the gross margin, you mentioned that we should consider the convergence to 32%-34%. Where does this number come from? Does this come from construction site savings? What is necessary for us to understand this dynamic?
Hello, good morning. Regarding the cash generation, 2017 was a strong cash generation year for Tenda, and this is because of two reasons. First, we were able to receive a lot of money from the legacy, and this helped us. The other aspect was the reduction of our average time, and this improved our working capital. We do not expect the increase in working capital. Regarding the reimbursement, we hope to have a higher volume because of our investments and lands. What we are projecting for 2018 is that we will have low cash generation. It will still be positive, but it will not follow the trends observed in 2017.
The low-income model is a cash generator, even in moderate growth scenario. We believe that we will grow 10% a year. This allows us to have growth in 2018, but not in the same volume that we have in 2017. Regarding the gross margin, we believe that there are a few reasons for the convergence to 34% that we mentioned. The first is that it is possible that we will not see economy of savings on construction sites. We are feeling pressure of the heating up of the market. Last year, we were able to negotiate hard with our suppliers because they did not have any other alternatives on the market, and now they are able to pressure us on price. We have observed this, and we expect this to have an impact on the gross margin throughout time.
In the long term, we do not think that Minha Casa, Minha Vida will be changed. If you have a revenue that is frozen and your cost tends to grow, you will have a reduction in the gross margin. The third item is regarding our PDD. Today, we have a provisioning procedure that is very adequate and that considers no payments in the last six months, and we consider all this for clients who are still paying. However, this trend in the last six months has not been observed in the new model because we did not close the entire payment period.
We have a debt that is five years after we hand out the keys, and we did not reach this in any of the construction sites of the new model. We believe that we will have to observe this. Once this history is more complete, we will have a possibility that PDD will impact the gross margin more than today. This will be automatic without any need for audits, because this has been defined in the provision policies. This is why the gross margin would converge to 34%.
In case you want to make a question, please press star one. Our next question is from Luis Stacchini, from Credit Suisse.
I also have two questions. Could you talk about hiring? Everybody is trying to grow in this project. I would like to know your opinion about this trade-off of profitability and the higher use of subsidies. Do you believe that it makes sense to sometime reduce this to preserve the profitability of the FGTS, especially in the ranges two and three? The second question is regarding the capital structure. You are leveraged right now, and how are you going to think about an extraordinary distribution? There is still some debt that will probably be solved in the next quarters. What are the expectations considering all this? What is the timeline for this decision-making?
Regarding your question, I agree with you. These 70,000 units that are the goal of the government for this year are close to the limits that we are able to work using FGTS resources without using other resources. There is clearly a political will to increase this, and there are obvious reasons. In comparison to range two, when we talk about subsidies, this one takes more subsidies. From the social point of view, we would have to compare it with a 0.5 range. Globally, it requires less subsidies, and it is for the same group as the range one.
The government has interest in growing this segment. I and ABRAINC, the association that we are associated to, defend that in order to increase the 0.5 segment, we would need some countermeasures from the government, because otherwise it will not be sustainable. This is a lively discussion we have with the government on how to balance out the FGTS and the political will. Answering the capital structure question. The company has a cash position that is comfortable. We have over BRL 480 million in cash, which is more than our debt. This results in less than 20% liquid net on PL, and we have our cash generation model. This tends to increase throughout time.
On the other hand, our balance sheet shows that there is a strong capital reserve, and our accumulated debt will result in BRL 40 million. We believe that this accumulated debt, if we continue to use our profit of 2017, this debt will be zeroed in two quarters. What we have been doing, and this is one of the discussions that we had in the administrative council regarding the decision we will make on the capital structure and how we could distribute the excess capital.
This discussion is still underway. We hope that in the coming months, we will have a clearer position on this topic. What we can tell you so far, what we have defined so far, is that it makes no sense to sell a leveraged company. There must be a leverage band where we could operate, and based on this, it would not be interesting for the company and for the shareholders to have a leveraged company. Tenda does not have a tax shield because our business model is based on tax on revenue.
The second issue is that although the low income has been more profitable, real estate is a cyclic market, and we have problems with uncyclic markets. This company has already a high leverage index. The turnover of our working capital is more than once a year. We hope to close all of this in the coming months, but we will probably have a very conservative capital structure within a leverage band, and we hope to define a strategy, either dividends or repurchase, and this will be decided in the near future.
Thank you for your answers. Just another question regarding the 1.5 range. Can you give us an idea how much this represents for you or represented for you in 2017, beginning of 2018, and if this increased?
It increased throughout 2017 because of the fact that the program was only viable after April 2017. In the last trimester, 2017, the 0.5 represented 50% of our operations in terms of launches. We believe that this is a number that is close to the number that should be stable for Tenda.
Thank you, and good morning to all of you. Once more, if you want to ask a question, please press star one. Please wait while we gather the questions. Our next question comes from Renan Manda from Santander.
Hello, Rodrigo and Renan. You mentioned your seventh region, Curitiba. Could you provide us more detail on this project in Curitiba? What are the volume of launches that we can expect this year and next year in the region of Curitiba?
Renan will answer your question.
Curitiba started very well. Our expectation was very conservative. In terms of sales performance, this construction site has gone beyond our expectations, exceeded our expectations. This is a consequence of our expansion strategy, but this does not change our idea of gradually expanding to other cities and even within Curitiba. What do I mean with that? We were able to stabilize our operational parameters in Curitiba. Because of this, the Curitiba operation will be the lowest operation of Tenda. Not because there is no demand, but because, among other things, we want to grow as we feel more comfortable in this region.
Thank you.
Our next question is from Raul Grego from Eleven Financial.
Thank you for the opportunity of asking a question. I would like to understand the land acquisition pace. Last year, you focused on land acquisition, and what do you expect for 2018? Will you hold this pace or are you going to reduce the pace in 2018?
Thank you, Raul. Thank you for your question. Regarding land acquisition, 2017 was a year where we had a record in land acquisition. This gave us some comfort in some of the areas we work in. On the other hand, Tenda believes that we need to expand our land bank to be in a comfortable position. We have a policy of three years of land bank in-house, but this for each region. So we separate the regions, and in each of these regions, we expect three years of land bank. The gross number that we have might cause some misunderstanding. Our vision of a land bank for a BRL 1.7 billion operation like we had last year, our land bank should be BRL 7 million or BRL 8 million of VGV in land bank.
So we still need to buy more than we are going to launch in order to be comfortable with our land bank. On the other hand, we do not foresee performance as high as in 2017 for 2018. We expect to buy more than we will launch. We have the structure for that, but BRL 3.9 billion was something exceptional that should not be repeated this year.
Thank you.
Again, to ask a question, press star one. Please hold for another question.
I thank you all for your participation in this call. We will be available through our AR channels, and we are at your disposal if you have any further doubts or questions. Whenever you need, please ask, and let's move on. Let's start 2018. Thank you very much.
The conference call of Tenda is now closed. We thank you all for your participation, and have a nice day. Thank you.