IFM Investments' (CTC) CEO Donald Zhang on Q1 2014 Results - Earnings Call Transcript

May.22.14 | About: IFM Investments (CTC)

IFM Investments Ltd (NYSE:CTC)

Q1 2014 Earnings Conference Call

May 16, 2014 08:00 AM ET

Executives

Jingjing Zhang - 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's First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded.

I will now turn the call over to your host for today, Jingjing Zhang.

Jingjing Zhang

Thank you everyone, for joining us for Century 21 China Real Estate's first quarter 2014 earnings conference call. Joining us today are Donald Zhang, co-founder, chairman, and chief executive officer; Harry Lu, co-founder, vice chairman, and president; and Steve Ye, chief financial officer.

Before we continue, please allow me to read you our safe harbor statement. Some of the statements during this conference call are forward-looking statements, made under safe harbor provision 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 Limited 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 unavailable to listen to this call at this time, a recording will be available via webcast until May 24 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, Jingjing. Good day everyone, and thank you for joining us on today's call.

The first quarter was a challenging quarter for Century 21 China and the whole industry, with transaction volumes at particularly low levels throughout the quarter. The usual seasonal dip around the Chinese new year was especially pronounced this year, and the uptick we would normally expect to see in March did not really materialize.

In contrast to what's happening over the last couple of years. The low transaction volumes we saw in the first quarter of 2014 were driven by the market rather than government policy. Oversupply has been a particular problem in second- and third-tier cities, where prices have started to drop. In first-tier cities, where our company-owned brokerage stores are located, prices have remained relatively stable, which has kept transaction volumes at depressed levels.

The year-on-year drop in transaction volumes in the first quarter was further exaggerated by the huge surge we saw last March before new capital gains tax regulations came in.

It's clear that while underlying demand is strong, buyers in Beijing and Shanghai are continuing to hold off until prices come down. And judging by the data we have for April, we do not anticipate a significant uptick in transaction volumes in the near future.

From our perspective, our focus will remain on reducing our cost base, optimizing our network and developing the parts of our business with better growth and profitability profiles, notably our mortgage management and franchise services.

While the quarter was weaker than what we had expected, we remain confident about the delivering sequential improvements in our bottom line through the rest of this year, driven by our cost-cutting initiatives, continued expansion of our mortgage management and franchise businesses, and a gradual recovery in our business fundamentals, especially from the primary segment.

With that, I'll turn the call over to Harry, for a closer look at our first quarter performance.

Harry Lu

Thanks, Donald. The first quarter was tough for the whole market, with low transaction volumes that failed to pick up significantly after the Chinese New Year. Thus our revenue came in at about RMB135 million, which was below our prior expectations.

Given the dependence of our core business on transaction volumes, we continued to focus efforts on our more profitable revenue streams, notably mortgage management services and the franchise service, which posted solid year-on-year topline growth of 43.8 percent and 40 percent respectively.

We also drove forward with cost reduction efforts, notably in the back office, and continued to reduce our overall store count.

We had an average of 225 stores in operation during this quarter, down from 260 stores in the fourth quarter of 2013. By recognizing the majority of closure-related spending at the end of last year, and to a lesser extent in Q1, we'll see more prominent cost savings in Q2. And, more broadly, the adjustment we've made to our cost base will lend important support to the bottom line during a tough time for the market.

While it's difficult to predict how transaction volumes will trend in the next couple of quarters, we still have a very strong pipeline in our primary business and a solid market position with our company-owned stores. And with our leaner store network, and our focus on developing the most profitable segments of our business, we remain confident that we can achieve profitability this year.

Now, I want to go through the performance of our business segments in the first quarter.

Our company-owned brokerage segment was unsurprisingly the worst affected by the poor market conditions this quarter. Revenue for this segment was down just under 38.8 percent from the previous quarters.

In the long term, though, we are confident that we still have a good market position to capture opportunities when transactions pick up again. Revenue for our primary segment decreased by 30.5 percent, again as a result of a depressed market as well as some project delays.

However, Shanggu remains well positioned in primary brokerage and we have a strong pipeline that we hope to realize later this year.

As I mentioned, we made good progress with our mortgage management services segment during Q1. Revenue this year was up almost 44 percent from the same period last year, thanks to our effort to expand our mortgage credit loan business. This is going to be a big focus area going forward. And we expect expansion on both the top and bottom line.

Franchise services were another relatively positive area. Revenue here was up 17 percent, thanks largely to new franchise agreements we signed in Beijing. These additional stores will play an important role in maintaining our network footprint through the current market.

We announced a development in our franchise business last month, when we added Lanzhou as a new regional franchise. We continue to look for partners in other areas where we see growth prospects, and we hope to have more updates to share later this year.

So, to sum up, Q1 wasn't the start to the year we were hoping for on the top and bottom line. And as you can see from our press release, we only expect moderate revenue growth going into Q2 by historical standards, given the current trend in market conditions.

Nonetheless, we are still confident that the work we are doing to develop our more profitable business segments will give a boost to our bottom line, and the cost reduction initiatives we brought in late last year should really gain traction through the next couple of quarters.

Overall, then, we remain confident that 2014 can be a profitable year for Century 21 China Real Estate.

With that, I'll turn the call over to Steve for a more detailed look at our financial performance in Q1.

Steve?

Steve Ye

Thank you, Harry. Now, I would like to share with you our unaudited financial results for the first quarter of 2014.

Please note, our revenues and expenses are denominated in RMB. The company total consolidated net revenue included in 2014 was 134.9 million, down 33.6 percent, quarter over quarter, and 48 percent year over year.

The sequential decrease was primarily due to the seasonal decline in transactions around Chinese New Year coupled with a broader nationwide slowdown in transaction volumes in the secondary and the primary property markets.

The year over year decline was exaggerated by the abnormally high transaction volumes in the first quarter of last year, on the back of the rush-in effect before the enforcement of capital gains tax regulations in Beijing and Shanghai in April 2013.

However, revenue from mortgage management services increased to 43.8 percent year on year, and the revenue from franchise service grew 40 percent year on year.

This was a result of our efforts to expand our mortgage credit and loan segment and our success in reaching more agreements with new franchisees in Beijing.

Before we go into details on our revenue, I just wanted to highlight that you can also refer to the new table we introduced in our earnings release this quarter, which breaks down the financial and operating data of each of our four business segments.

We’ll be breaking the revenue down like this from now on for ease of reference.

So, as for the details…

Revenue from our company-owned brokerage service segment was 92.5 million in the first quarter of 2014, accounting for 69.3 percent of our overall revenue, representing a 38.8 percent sequential decrease and a 56.5 percent year over year decrease.

As we mentioned earlier in this call, the sequential decrease in Q1 2014 was primarily due to a seasonal decline around Chinese New Year, while the year over year decrease in Q1 2014 was driven by the nationwide market slowdown and an abnormally high level of market transactions in March 2013, resulting from the market’s anticipation of the enforcement of capital gains tax regulations in the April 2013 in Beijing and Shanghai.

The company's transaction volumes in the first quarter of 2014 were also impacted by our ongoing efforts in network restructuring and cost reduction, as we cut the number of sales offices, mainly in Beijing and Shenzhen, in the first quarter of 2014. The average number of company-owned sales offices in operation decreased to 225 in Q1 of 2014 from 260 in Q4 of 2013, and the 316 in Q1 2013.

We completed our 1,906 sales and purchase transactions during the first quarter of 2014, compared to 3,533 in Q4 2013 and 5,812 in Q1 2013.

Our average monthly net revenues per operating sales office for Q1 of 2014 decreased to 138,765 from 196,067 in Q4 2013 and 226,795 in Q1 of 2013, primarily as a result of overall market weakness.

Revenue for our primary and commercial service segment in Q1 2014 was 26.2 million, accounting for 19.5 percent of our overall revenue, representing of 30.5 percent sequential decrease and a 22.5 percent year over year decrease.

The sequential decrease was primarily due to lower GFA of new properties sold in Q1 2014 as well as project delays.

The year over year decrease was primarily due to the continued optimization of our primary and the commercial segment. We sold 83,190 square meters GFA of new properties in Q1 2014, compared to 108,960 square meters in the previous quarter and 171,330 square meters in the same period of 2013.

Within total commission revenue from our primary segment in Q1 2014, 83 percent came from selling commercial properties, including five grade-A office buildings in Beijing by Shanggu. The weighted ASP and commission rate for commercial properties are much higher than those for residential properties.

For Q1 2014 the weighted average ASP for properties sold by our primary segment was 16,882 per square meter, with a weighted average commission rate of around 2.17 percent from developers, both higher than ASP of 16,079 and commission rate of 2.16 percent in Q4 2013, and ASP of 12,209 and commission rate of 1.77 percent in Q1 2013.

In addition, we 33 million worth of commission pending for Shanggu as of March 31, 2014, relating to certain commercial properties sold which were not yet eligible for commercial mortgage requirements according to PRC banking regulations. Management expects that these commission revenues will be recognized in the coming quarters. Shanggu remains well positioned in primary brokerage, and has a strong pipeline, with a total GFA of 2.3 million square meters as of March 31, 2014.

Revenue from mortgage management services in Q1 2014 was 11.5 million, an 18.6 percent sequential increase, and a 43.8 percent year over year increase, thanks to growth in the overall amount of mortgage credit loans provided by the company. We expect this growth momentum to continue in 2014 as we pursue opportunities within the segment more aggressively.

Within our mortgage management segment, revenue from service fees and interest earned from mortgage credit loans in Q1 2014 was 7.6 million, representing a 10.1 percent sequential increase, and a 162.1 percent year over year increase, and accounting for 66 percent of total mortgage management services revenue in Q1 2014, as compared to 71 percent and 36 cent in Q4 2013 and Q1 2013 respectively. Revenue from advising consumers for traditional home mortgage loans, home equity loans, and other kinds of loans was 3.9 million, representing a 39.3 percent sequential increase and a 23.5 percent year over year decrease, and accounting for 34 percent of total mortgage service segment revenue in Q1 2014, as compared to 29 cent and 64 cent in Q4 2013 and Q1 2013 respectively.

Revenue from our franchise service segment in Q1 2014 was 3.5 million, representing a 23.3 percent sequential increase and a 48 percent year over year increase.

These increases were primary due to higher initial franchise fees received in Q1 2014 as we signed more agreements with new franchisees in Beijing. The average number of franchise sales offices in Beijing in Q1 2014 was 40, compared to 33 in Q4 2013 and 23 in Q1 2013.

On the cost side, our commission and other agent-related costs in Q1 2014 were 99.2 million, which accounted for 73.5 percent of total net revenue, representing a 26.5 percent sequential decrease, and a 36.2 percent year over year decrease.

These decreases were mainly due to a reduction in variable costs. Specifically, variable costs decreased by 26 million from Q4 2013 and by 52.9 million from Q1 2013, as a direct result of lower revenue generated from our company-owned brokerage segment. Additionally, fixed salaries and benefit costs for sales staff decreased by 9.8 million from Q4 2013 and by 3.5 million from Q1 2013, mainly due to a decrease in the number of staff employee in our company-owned brokerage segment. Average sales staff numbers decreased to 4,528 for Q1 2014 from 5,547 for Q4 2013, and 5,756 for Q1 2013.

Total consolidated operating costs for Q1 2014 were 39.2 million, representing a 19.7 percent sequential decrease and a 7.5 percent year over year decrease. The sequential decrease was mainly a result of lower costs related to sales office closures as we incurred 7.9 million in write-off charges, relating to sales office closures in Q4 2013, compared to 0.3 million in Q1 2014. The year over year decrease was mainly due to lower rental and other store-related costs resulting from a reduction in a number of sales offices in Beijing and Shenzhen. Total depreciation and amortization expenses for Q1 2014 were 5 million.

Our total SG&A expenses in Q1 2014 were 51.4 million, representing a 29.7 percent sequential decrease and a 4.8 percent year over year decrease. The sequential decrease was mainly due to a decrease in marketing expenses, professional fee accruals, and salary and benefits for back-office staff as a result of headcount reductions. The year over year decrease was mainly due to a decrease in professional fees and in provisions for bad debt related to our primary and commercial service segment.

Net loss in Q1 2014 was 47.4 million, compared to net loss of 46.3 million in Q4 2013, and net income of 7.7 million. Excluding one-time restructuring costs, primarily store closure-related costs, of 3.1 million in Q1 2014, net loss in Q1 2014 would be 44.3 million.

Excluding share base compensation expenses, goodwill impairment losses and net change in fair value of contingence consideration, net loss attributable to IFM Investments Limited for Q1 of 2014 was 47.4 million, compared to a non-GAAP net loss of 37.5 million in Q4 of last year, and a non-GAAP net income of 5.5 million for Q1, 2013.

In terms of our balance sheet and cash flows, we had 100.1 million in cash as of March 31, 2014, compared to 145.6 million as of December 31, 2013. For Q1 2014, net cash used in operating activities was 48.2 million, compared to net cash provided by operating activities of 6.2 million in Q4 2013 and net cash provided by operating activities of 9.1 million in Q1 2013. Net cash provided by investing activities for Q1 2014 was 13.5 million, mainly including net cash of 16.5 million received from providing and receiving repayments on mortgage credit loans and the purchase of equipment of 2.9 million.

Our net accounts receivable balance as of March 31, 2014 was 155.2 million, a decrease from 168.9 million as of December 31, 2013. Our average AR turnover was 111 days for Q1 2014.

Moving on to guidance for second quarter 2014…based on the current market conditions, we estimate that our total net revenue for the second quarter of 2014 will be in the range of RMB150 million to RMB160 million. The forecast reflects our current and preliminary view, which is subject to change. This concludes our prepared remarks.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. We would now begin the question and answer session. (Operator Instructions)

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 earning calls today. We look forward to speaking to everyone again soon. Good day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all now disconnect.

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