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IFM Investments Ltd. (NYSE:CTC)

Q4 2013 Earnings Conference Call

March 10, 2014 08:00 AM ET

Executives

Nick Beswick - Brunswick Group, IR

Donald Zhang - Chairman and CEO

Harry Lu - Vice Chairman and President

Steve Ye - CFO

Analysts

Operator

Good evening, and thank you for standing by for Century 21 China Real Estate Fourth Quarter and Full Year 2013 Earnings Conference Call. (Operator Instructions). Today's conference call is being recorded.

I will now turn the call over to your host for today, Nick Beswick.

Nick Beswick

Thanks, everyone for joining us for Century 21 China Real Estate's Fourth Quarter and Full Year 2013 Earnings Call. With us today are Donald Zhang, Co-Founder, Chairman, and Chief Executive Officer, Harry Lu, Co-Founder, Vice Chairman, and President; and Steve Ye, the Company's Chief Financial Officer.

Before we continue, please allow me to read you IFM Investments' Safe Harbor statement. Some of the statements during this conference call are forward looking statements made under the Safe Harbor Provisions of section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC.

IFM Investments, Ltd., does not undertake any obligation to publicly update any forward looking statements whether as a result of new information, future events, or otherwise, except as required by applicable law.

For those of you unable to listen to this call -- the entire call at this time, a recording will be available via webcast until March 19th, on the Company's corporate website, at www.century21cn.com/english.

At this point, I would like to turn the call over to Mr. Donald Zhang.

Donald Zhang

Thank you, Nick. Good day, everyone, and thanks for joining us on today's call.

Overall the market improved in 2013 as we continued to see stability in transaction volumes in major cities. And with the exception of new capital gains tax regulations early on in the year, the regulatory environment remained relatively stable. Slightly out of keeping with overall trends for the year, in the fourth quarter, transaction volumes were flatter in Beijing and Shanghai than we had anticipated. This led us to accelerate our efforts to optimize our network, which had an impact on our bottom line.

Looking to the year ahead, we still don't anticipate any significant changes in the regulatory environment. Overall, that should mean that the stability we saw in 2013 will continue into 2014. We are seeing downward trends in prices and transaction volumes in lower-tier cities. But, encouragingly, the outlook for the primary and the secondary segments in Century 21's core markets, namely Beijing and Shanghai, looks relatively positive.

With an optimized network which focuses on key neighborhoods in these markets, alongside our diverse revenue streams, we are confident we can perform solidly in 2014.

Now I will pass the call over to Harry, for a more detailed look at our performance in the fourth quarter and the full year.

Harry Lu

Thanks, Donald.

We were generally pleased with our performance through 2013. Having posted record quarterly revenue in the first quarter, our top-line performance remained relatively consistent through most of the year, even as we continued to optimize our sales network.

For the full year, revenue came in at RMB877 million, 17% ahead of 2012. However, we were somewhat disappointed by our top-line performance in the fourth quarter, which came in below our expectations, due to a weaker than expected market in major cities, particularly in Beijing.

As Donald said, in response to a weaker market, we made the decision to accelerate our efforts to streamline our store network in the fourth quarter. This included a sharp reduction in our company-owned store count, as well as the optimization of our backend teams, which generated sizable short-term costs.

We also realized from some overhanging cost from earlier this year. This combination of a factor clearly placed a lot of pressure on our bottom line, and our net loss increased to over RMB43 million. The positive news is that the most difficult part of this optimization process is behind us.

On the cost side, the while per-store productivity in our key markets is still very strong, we now have a smaller, leaner company-owned store count. And on top of this, a cost reduction program we put in motion in the fourth quarter should start to gain traction by the middle of this year.

Going to 2014, on the top line, we will look to expand the higher margin areas of our business, namely Shanggu and mortgage management services, alongside our core company-owned brokerage segment. Given these factors, we are confident we can achieve full year profitability in 2014.

Now I would like to update you on the performance of our various business segments in the fourth quarter.

Revenue from our company-owned brokerage segment came in lower than expected in the quarter, due to a weaker market environment than we had been anticipating. Overall, revenue declined 8% sequentially, and 20% year-over-year. But as I said, per-store productivity is still encouraging and we are expecting an uptick in performance in our core business through 2014.

We saw a better performance from the primary and commercial segment in the quarter, with revenue increasing over 80% on a sequential base. Much of this was down to us realizing a large part of the deferred primary revenue from Q3 during the quarter. Shanggu, which is a very profitable segment, will be a big focus of our growth through 2014.

We saw a slight sequential decline in revenue from mortgage-management services during the quarter. But looking to the year ahead, we are confident that this is an area where we’ll see strong top-line growth. It's already a relatively high-net margin business and we’ve developed the segments to a point where we think it can become increasingly profitable over the next several quarters.

Franchise fees declined just under 19 percent during the quarter on a sequential base, and by 57 percent year-over-year. The decline from Q4 2012, was a result of a franchise fee we recognized during that quarter from Urumqi. Looking to 2014, we plan to increase the number of franchises in our major cities as a cost-effective way of increasing our network coverage and improving brand exposure.

So, overall in 2013, we were reasonably pleased with our performance. We were able to take advantage of a general improvement in the market, to pose a solid revenue growth for the full year, and while our bottom line is still not where we want to be, we’re confident the strategy we have put in motion will bring a significant improvement in 2014.

With the cost reduction efforts we introduced in Q4, as well as a more streamlined network and our sharpened focus on Century 21 China's most profitable business segments, we are hoping to achieve top-line growth as well as the profitability for the full year.

With that, I would like to turn the call over to Steve, for a more detailed look at our financial performance for the fourth quarter and the full year

Steve Ye

Thank you, Harry. Now I would like to share with you our fourth quarter and full year 2013 unaudited financial results.

The Company's total consolidated net revenue in Q4 2013 was RMB203.1 million, representing a 10.4% year-over-year increase. The Company's total consolidated net revenue for the full year of 2013 reached a record high of RMB877.5 million, an increase of 17.2% from 2012.

Revenue from company-owned brokerage service segment continued to account for a majority of our total consolidated net revenue, at 79% for 2013. Q4 2013 revenue for this segment decreased 10.6 percent year-over-year, to RMB152.7 million. And the 2013 full year revenue increased 10.8% to RMB691.3 million from 2012.

So year-over-year decrease in Q4 was mainly due to a reduction in the number of sales offices, especially in Beijing and Shenzhen which resulted in lower transaction volume as we completed 3,533 sales and purchase and sales transactions during the fourth quarter, versus 4,472 transactions in the same period of 2012.

The increase for the full year was mainly due to higher transaction volume, and improved per sales office performance in 2013. The number of total sales and purchase transactions increased from 16,836 in 2012 to 17,026 in 2013.

The average number of company owned sales office in operation decreased to 260 in Q4 of 2013 from 318 in the same period of 2012.

Our average monthly net revenues per operating sales office for Q4 of 2013 increased to RMB196,067 from RMB178,706 in Q4 of 2012. On a full year basis the average number of sales office in operation decreased to 300 in 2013 from 326 in 2012 and over the same period our average monthly net revenues per office increased to RMB192,040 in 2013 from RMB159,450 in 2012. In Q4 and in the full year 2013 commission from selling new office accounted for 23% and 70% respectively of total revenue from our company owned brokerage service.

Revenue from our Primary and Commercial Service segment in Q4 was RMB37.7 million representing 18.6% of total net revenue and 9.8% year-over-year decrease. The decrease was primarily due to lower GFA of new properties sold. For full year 2013, revenue in the segment reached a record high of RMB137.3 million, an increase of 61.3% from 2012.

This was mainly attributable to greater GFA sales of 544,950 square meters for full year 2013. Primary and commercial service was our record largest -- was our second largest business segment in 2013. Our acquisition of Shanggu in 2012 started to contribute meaningfully to revenue accounting for 94% of total primary segment GFA sold in Q4 and 86% of the primary GFA sold in full year 2013.

Among total commission revenue from the primary segment in full year 2013, 65% came from selling commercial properties including five Grade A office buildings in Beijing through Shanggu. For 2013, the weighted average ASP from properties sold by our primary segment was RMB14,219 per square meter with a weighted average commission rate of around 1.97% from developers.

For the full year 2013, the Primary and Commercial Service segment achieved 17.8% net income margin before allocation of any headquarter expenses. In addition we had RMB30 million worth of commissions mainly for Shanggu as of December 31, 2013 related to seven commercial properties sold which were not yet eligible for commercial mortgage requirements according to PIC banking regulations. This commission revenue will be recognized in 2014 and afterwards.

Revenue from mortgage management service in Q4 was RMB9.7 million, representing a 34.7% year-over-year increase. Revenue from mortgage management service in fiscal year 2013 reached a record high of RMB36.8 million which was 43.2% increase from 2012. The year-over-year increase in Q4 was primarily due to an increase in the total volume of mortgage credit loans provided by the company. The annual year-over-year increase was primarily due to increase in revenues from mortgage credit loans, traditional home mortgage loans and home equity loans. Revenue from service fee and interest earned from mortgage credit loans in Q4 was RMB6.9 million, representing a year-over-year increase of 122.6%.

Revenue from service fees and interest earned from mortgage credit loans for the full year was RMB17.3 million, an increase of 69.6% from 2012. The percentage of revenue from providing mortgage credit loans accounted for 71% and 47% of total mortgage service segments revenue in Q4 2013 and the full year 2013 respectively as compared to 43% and 40% in Q4 2012 and full year 2012.

Revenue from advising consumers for traditional home mortgage loans and home equity loans and other types of loans were RMB2.8 million for Q4 of 2013 and RMB19.5 million for full year 2013, representing a 31.7% quarterly year-over-year decrease and a 25.8% annual year-over-year increase and accounted for 29% and 53% of total mortgage service segment revenue in Q4, 2013 and full year 2013 respectively as compared to 57% and 60% in Q4, 2012 and full year 2012.

For the full year 2013, our mortgage management service segment achieved 27% net income margin. Revenue from our franchise service segment in Q4 2013 was RMB3 million, representing a 57.1% year-over-year decrease. Franchise segment's revenue for the full year 2013 was RMB12.1 million, a 9.7% decrease from 2012. This decrease was primarily due to higher initial franchise fees received in 2012 as the company resold the franchise rights to Urumqi.

On the cost side, our commission and other agent related costs in Q4 of 2013 were RMB134.9 million almost equal to the cost in Q4 2012 and RMB562.4 million in full year 2013, a 23.5% increase from 2012. This increase was mainly due to variable costs.

Also fixed salaries and benefits costs for sales staff increased RMB43.4 million in 2013 from 2012. This increase was mainly due to an increase in number of staff in our company-owned brokerage segment. Average sales staff numbers increased to 6,002 for full year 2013 compared to 5,360 in the full year 2012. Total consolidated operating cost for Q4 was RMB48.8 million representing an 11.2% year-over-year increase. Total consolidated operating cost for the full year was RMB184.4 million a 5.2% increase from 2012. We incurred RMB7.9 million in write-off charges related to sales office closures in Q4 compared to RMB0.5 million in Q4 2012.

We incurred RMB11.9 million in write-off charges related to sales office closure in the full year 2013, compared to RMB6.5 million in 2012. Excluding expenses related to sales office closures, total operating cost decreased by RMB2.5 million in Q4 2013 from Q4 2012 and increased by [RMB0.7m] in fiscal year 2013 from 2012. Sequentially year over year decrease was due to lower service charges associated with lower revenue from primary and commercial service. The annual year-over-year increase was mainly due to increase in rental cost resulting from an increase in average rental rates in the company-owned brokerage network in 2013.

Additionally, the service charges associated with revenue from primary and commercial service were also higher than in 2012. Total depreciation and amortization expenses were RMB5.9 million and RMB23.3 million in Q4 in the fiscal year 2013 respectively. Our total SG&A expenses in Q4 was RMB73.1 million representing a 64.3% year-over-year increase. SG&A expenses for the full year was RMB234.1 million representing a 31.9% increase from 2012. This increase was largely due to an increase in marketing expenses as well as an increase in non-sales payroll as a result of more non-sales staff high risk to all of our business segments.

Net loss for Q4 2013 was RMB46.3 million compared to net income of RMB2.1 million in Q4 2012. Net loss for full year 2013 was RMB85.9 million when compared to a net loss of RMB50.1 million in 2012. Excluding restructuring costs primary stock closure related cost of RMB11.9 million in Q4 2013 and RMB15.9 million in full year 2013. Net loss in Q4 2013 would be RMB34.4 million and a net loss for full year 2013, or be RMB70 million.

Excluding share based compensation expenses that were impairment losses and the net changes in (inaudible) of contingent consideration. Non-GAAP net loss attributable to IFM Investments Limited on Q4 2013 was RMB37.5 million, compared to a non-GAAP net losses of RMB1.1 million in Q4 of last year and RMB84.5 million for full year 2013 compared to RMB51.3 million mainly in 2012.

On our balance sheet side, we had RMB145.6 million in cash as of December 31, 2013 as compared to RMB157.8 million as of September 30, 2013. We achieved positive operating cash flow of RMB6.2 million in Q4 2013. For full year 2013 net cash used in operating activities was RMB34.6 million, a slight increase from RMB31.7 million in 2012. The year-over-year increase was mainly due to the greater operating loss incurred in full year 2013. Cash used in investing activities for fiscal 2013 was RMB27 million our net accounts receivable balance as of December 31, 2013 was RMB168.89 million, a decrease from RMB180.1 million as of September 30, 2013. Our average AR turnover day was 76 days for the first quarter and 72 days for the full year 2013.

Regarding guidance for the first part of 2014 based on the current market conditions as we did say earlier, we are estimating our total net revenue for the first quarter of 2014 revenue in the range of RMB140 million to RMB150 million. Given the strategy we have put in motion, we expect the total net revenue for the full year [indiscernible] increase and we can be profitable for the full year in 2014. This forecast reflects our current and preliminary view which is subject to change. This concludes our prepared remarks. Operator, we're ready for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session for today's call. (Operator instructions.)

We are now approaching the end of the conference call, I will now turn the call over to the CFO of Century 21 China Real Estate, Mr. Steve Ye, for his closing remarks.

Steve Ye

Thank you, everyone, for joining us for our earnings call today. We look forward to speaking with everyone again, so good day.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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