Good afternoon and welcome to the Tenda's conference call to discuss the results for the third quarter 2017. This conference call will be conducted by Rodrigo Osmo, CEO, and Renan Sanches, Controlling Director. 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 company's presentation. After Tenda's remarks are completed, there will be a question-and-answer session. Should you need assistance during the call, please press star zero to reach the operator. Before proceeding, I would like to clarify that this conference call relates to financial results of Tenda for the third quarter 2017, and the information currently available. The company's management's remarks are subject to risks and uncertainties and may refer to future events. Any macroeconomic policy and legislation changes or other operating results may affect the results of the company's performance.
Mr. Osmo, you may proceed.
Good afternoon, everyone. Tenda posted a period of solid results for the third quarter 2017. Some of our key metrics have shown positive evolution, highlighting launches, prospecting, profit, and cash generation. The low-income residential segment, which has shown resilience amid the recessionary economic environment that we have experienced over the last two years, has been in strong demand throughout 2017, thanks to its strong demographic predictability. Net sales of BRL 385 million in the quarter came in line with the second quarter, when historically we record strong SOS due to Feirão da Caixa or Caixa Fair. In annual comparison, net sales rose 61%.
This strong third quarter performance is mainly due to the quality of our launches mix in regions of high demand, such as São Paulo and Rio de Janeiro, which have a shortage of products, and a decrease in cancellations to levels consistent with recurring expectations. In the nine-month period, our net VSO, sales oversupply, totaled 49% against 45% in the first nine months of 2016, attesting the resilience of the low-income segment. We also recorded an 83% increase in transferred units compared to the third quarter 2016, enabling record cash generation, which totaled BRL 83 million this quarter. We ended the quarter with 40 construction sites, all of them on schedule. Tenda acquired in the quarter land with launch potential of BRL 1.7 billion, ending the period with a land bank valued at BRL 6.3 billion in PSV, an increase of BRL 1.2 billion that improves our visibility in future launches.
Aiming at protecting us from eventual operational challenges related to the Federal Savings Bank and FGTS, we decided to speed up the third quarter launches, which reached the highest level under the new model, BRL 488 million, 50% higher than the same period last year. We are closely monitoring the discussions on the Federal Savings Bank and FGTS, and although we understand that these issues may bring certain operational vulnerability in the short term, we believe that these are healthy for the long-term sustainability of these institutions and for ensuring the continuance of the MCMV program level two. Tenda's main financial indicators continue evolving. Compared with the third quarter 2016, net revenue went up 34%, adjusted EBITDA increased 27%, and net income grew 33%, totaling BRL 31 million in the third quarter 2017. Adjusted gross margin reached 40%, an increase of nearly five PP year on year.
Driven by projects in higher profitability marketplaces and return on provisions for doubtful accounts to steady levels. From the cost and expenses perspective, the litigation provisions recorded a sharp increase of 330% compared to the previous quarter, totaling BRL 28.3 million in the third quarter 2017. This increase was due to higher expected losses in civil lawsuits from legacy projects, reflecting a complete review on the base of these legal actions. This non-recurring adjustment accounted for an extraordinary expense of BRL 21 million. Regarding indebtedness, Tenda continues to show negative net debt to shareholders' equity ratio, accounting to 40% of net cash, which makes us one of the most unleveraged companies in the sector. Regarding profitability, net income doubled in the nine first months of 2017 compared to the nine first months of 2016.
This comparison is even more striking in the last 12 months, from BRL 19 million in the third quarter 2016 to BRL 86 million in the third quarter 2017, an amount almost five times higher. However, despite evolution, the company's return on equity, ROE, in the last 12 months was only 7.5%, still much lower than expected by our shareholders. Looking ahead, Tenda continues focusing on a sustainable growth strategy and excellence in execution with our business model established in a segment with high barriers to entry, pursuing more attractive levels of profitability, which justify the investment in Tenda. We sustain the vision of being the company of Brazil's low-income residential segment, which delivers the best return to its shareholders. We are now available to take your questions.
Thank you. We are now going to start the Q&A session. To ask a question, please press star one. To remove a question from the list, press star two. Our first question comes from Luis Garcia from Bradesco Bank. You may proceed, sir.
Good afternoon. Thank you for the call. I have two questions. The first one is related to contingency, which I believe today is the main potential of profit of the company. I think this is all connected to contingencies. You have recorded high levels along these years in terms of ROI. We can see the big differential in these aspects. We have been trying to recognize as much as possible and have all the possible provisions. After having said that, I would like to know how do you see the legacy aspects ahead when we talk about the deliveries in the months ahead. I imagine that the number of shares are coming down.
I would like to know how you see contingency in the months to come and in the years to come. The second question is related to the gross margin. I think we have already talked this over often, and you know that the company in the long term is more conservative in its approach, considering how it sees the market and other aspects. But when we look at the reported margin, it seems that within a year or a horizon of short or medium term, the margin may be higher than the 30 that you mentioned. How do you see this gross margin trend in a shorter horizon, considering one year or one year and some months?
Good afternoon, Luis. I am going to answer the question related to margin.
In fact, we have a gross margin which is much higher than the 30% and 32%, as is the expected margin for the company. This is a margin without major adjustments. There have been no significant adjustments to this margin above this margin, and it reflects the operation of the company. We consider the rest margin, we can see that it would come to 48%, which would be the correct margin. We are going to send the correction note. How do we project this? When we look at the revenues, we come to BRL 250 or BRL 300 million. We have less than one quarter to recognize the revenues. We do not have many quarters recorded at this level. When we look from now on, it seems that some of the results are expected.
In the next quarters, we are expected to have some margins above this stable level. In addition to that, we can see that maybe our expected margin would not be 30% or 32%, but rather 32% and 34%. We are reviewing all the figures at present, and we believe that even though the fourth quarter has a higher margin, the base scenario adopted by the company is that we are going to continue believing that we are going to stabilize in 32% and 34%, but not within a year, but maybe a little bit more in the future. Maybe Renan will take your question. In the next one year, we might see a level higher than this range. Yes, I believe so. If there's no extraordinary expense or cost, we will work on levels which higher than 32% and 34%. This is how we see the future.
Good afternoon, Luis. In relation to contingencies, when we look ahead, it's exactly what you mentioned. The fee was delivered in 2013, so we are going to have a lower trend along the time. Even after the lawsuit is open, there has to be a time for the loss to be recorded. The company expects that 2017 would have reached the peak without considering the recurring effect. 2018, we are likely to have a year which is similar to 2017. From then on, we are going to have a decrease in the contingencies as a percentage of recorded figures for the company. The new model has fewer contingencies. The reasons why lawsuits are filed are less critical. This will help to decrease the number of contingencies compared to what we have today.
We have a positive outlook for the future, but it will take some time until this is materialized in our results.
What about the possibility of increasing the number of agreements or settlements so as to reduce this number? Is it something you're considering? Do you think this is feasible, try to come into agreed agreements and settlements? How do you see that? We are very active in making legal agreements.
We have a very aggressive policy in this regard. We always attempt to make agreements, but we do not see major variations in our current policy.
Our next question comes from Nicole from Credit Suisse. You may proceed, ma'am.
Hello. Good afternoon, everyone. The gross margin was quite strong for the quarter. I would like you to make some comments on this and if it has to do with the construction projects and land, if it has to do with the legacy. You have some projects in some regions, and you're operating at high margins, more than 40%. I would like to understand this better. The other question is related to Federal Savings Bank or Caixa. The advancement of FGTS. So these are my questions. I don't know if I quite understood your second question. Can you repeat that, please? Yes, of course. There was a discussion to consider the advancement of FGTS in Federal Savings Bank as a factor which could even be higher than that. I would like to know if there's any changes, any updates on this discussion.
Okay. Let me start from this question.
The technical understanding of Federal Savings Bank and the Central Bank of Brazil is that the subsidy Federal Savings Bank receive as interest, half of it, BRL 10,000 or BRL 11,000, can be considered as income. This BRL 11,000 income generates equity, which is higher than the one required for the agreement. So this is a very important understanding because it segregates the market with a range of 1.5 and two. That would be a very interesting dynamic because this range would the Federal Savings Bank to make agreements. It's almost one way to provide protection and a mechanism the Federal Savings Bank to help with the Basel aspects. In relation to the gross margin, what we have noticed in this quarter is related to the operational aspect. We do not have a lot of contribution from land.
We had some savings from construction activities, which were quite relevant. We managed to have a sales performance, which was quite significant in regions where our gross margin was higher, such as in Rio de Janeiro and São Paulo. So we understand that the margin is based on recurring factors. Just to follow up then. The margin of São Paulo and Rio, where do they stand? São Paulo, 43% or 42%. There's another factor that I need to mention. The 1.2 level was important in terms of sales. I do not know how much we reached in the 1.5 range. That we launched those projects where the income is low. For this range helped us in generating the margin or improving the margin of the company.
Okay, great. Thank you very much.
Our next question comes from Alex Ferraz from Itaú BBA. Good afternoon, Rodrigo, Fernando.
Thank you very much for your presentation. I have two questions. One related to Federal Savings Bank, the Caixa. You felt or you had some difficulties in relation to making transfers in October, and then there was an approval. Has the situation come to the normal situation? Also in relation to São Paulo and Rio de Janeiro. The other question is related to the election of the board. I would like to know if there's any processes related to collection. I would like to know if there's any initiative that has already been implemented. What are the strategies that is going to be adopted by this board? But I still don't know if it's too early to make any decisions or have any comments.
I'm sorry. I was thinking over about the answer. In relation to Caixa, the Federal Savings Bank.
Yes, we had this issue related to the transfer to the company, and this is probably going to adversely affect the cash generation for the quarter. The situation has not normalized totally yet. The main problem that we had was the Basel discussion, and this has already been solved. Caixa still needs to make some operational adjustments in order to settle some issues related to Rio de Janeiro and São Paulo. Caixa has been very stringent in applying this budget. For it to make this normalization, Caixa needs to give additional steps in the process that blocks the process a little bit. The speed that we had in the transfers decreased a little. As a result, our backlog of transfers is above the average. This is a situation that tends to go back to normal levels but still hasn't.
This from the viewpoint of the transfers. In relation to production, the normalization, the transferring of production, it was based that the individual transfer would generate [Basileia Obasol] to the Caixa. This doesn't happen to the financials production. It's another reality. We still have some difficulty to contract this financing to production. What we are likely to do in the future is not to hire this, but to have some inflows for the undertakings so that we can have enough balance. That would change the cash profile of the company. We would have a higher employed capital for the investment. In relation to the second question about the new board. The board held three meetings up to now. It has been very active. We have been more focused on the governance of the company, collection.
Of course, we have had lots of contributions, but the board has been more focused on operational and governance-related topics. These are the attributions and responsibilities of the board.
Okay. Thank you. Thank you, Rodrigo.
Our next question come from Flavia. Flavia, may proceed. Ma'am.
Hello, good afternoon. Considering the company going public, I would like to know when you're going to distribute dividends.
Hello, Flavia. In fact, the company has retained losses, so the company is not able to distribute dividends in 2018, considering the results of 2017. What is likely to happen along next year is to have the board discussing cash policies. It has a very specific situation, generating cash quarter on quarter, and good leverage. Our net cash is quite significant, and this certainly is going to be a catalyst of a policy of distribution of dividends.
This is something that is going to be discussed next year. This is basically due to the retained losses that the company is having nowadays. This is going to change by 2019, when we will be able to pay dividends related to the previous year, 2018.
Thank you.
Our next question comes from Marcelo Motta from JP Morgan. You may proceed, sir.
Good afternoon. I have two questions. If you could mention how the expansions into new regions stand. Talking more about São Paulo too. I would like to know how are you testing those markets? The other question is related to the launch policies. If you are going to increase the working capital, and if it would support what is the company's approach in terms of launches, and what are the policies going to be like?
Are they going to follow the same policy as the previous quarter and this approach?
Hello, Marcelo Motta. In relation to expansion to new regions, in October, we launched the first development in Curitiba. It's the first productive project out of the six where the company had been operating since 2013. We expect this to be quite gradual. When we look at the company in five years' time, this may not even account for 15% of the revenues of the company, even though it's a very important leverage for a company. It's not going to be very significant in terms of results. I agree when you say that the margin of these new regions is lower than what we expect, considering the average of the six. We do not believe that these will have a significant impact in the future.
In relation to the launch policy, today's restriction for the launches is operationally related. We have good lands in demands and areas where we do not have an offer of products. We continue generating cash, and our capital structure is well-leveraged. The bottleneck is not capital, but the capacity to execute.
Perfect. Thank you.
Once again, we'd like to remind you that to ask a question, please press star one. To remove a question from the list, press star two. Please wait while we collect questions. Again, to ask a question, please press star one. If there are no further questions, we turn the call over to Mr. Osmo for his final remarks.
I would like to thank you all for attending this call and see you next quarter. Have a nice day, you all.
This conference call is now