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IFM Investments Limited (NYSE:CTC)

Q2 2012 Results Earnings Call

August 16, 2012 8:30 AM ET

Executives

Martin Reidy - Brunswick Group, IR

Donald Zhang - Co-Founder, Chairman and CEO

Harry Lu - Co-Founder, Vice Chairman and President

Kevin Wei - Chief Financial Officer

Analysts

Ella Ji - Oppenheimer

Joshua Hwang – Goldman Sachs

Operator

Good morning. And thank you for standing by for the Century 21 China Real Estate’s Second Quarter 2012 Earnings Conference Call. At this time, all participants are on 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, Martin Reidy.

Martin Reidy

Thank you, everyone, for joining us for Century 21 China Real Estate’s second quarter 2012 earnings call. With us today are Donald Zhang, Co-Founder, Chairman and Chief Executive Officer; Harry Lu, Co-Founder, Vice Chairman and President; and Kevin Wei, the company's Chief Financial Officer.

Before we continue, please allow me to read you IFM Investment's 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 Limited does not undertake any obligation to publicly update any forward-looking, 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 the entire call at this time, a recording will be available via webcast until August 23rd on our 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. Good day to everyone and thanks for joining us for today’s call. We are very pleased to report a strong performance in the second quarter. Market conditions improved significantly and we return to profitability on the back of very strong sequential revenue growth of 53.5%.

As you know, since last year we have been focusing or optimizing our sales network, while diversifying our revenue base to protect us from market fluctuation. Our encouraging results for the quarter illustrate how this strategy is working and is allowing us to capitalize our clear and sustain market recovery.

Across all of the major markets transaction volumes in the second quarter rose to higher level than we have seen for the last several quarters. There have been no significant changes to policy in the past quarter. The secondary market has been particularly strong, which is obviously good news for CENTURY 21 China.

Overall, we believe that buyer’s confidence is increasing and there is strong potential for continued growth across the secondary and the primary markets. However, we did see a slight decline in the primary sales in July and into August, as developers become less aggressive in providing discounts. The latest figures for August show a similar pattern in the secondary market, but we did not -- we do not think this is reflective for long-term trend.

While the market is undoubtedly in the much better place, I do want to make the point, that [perfections] are still a long way away from what we consider to be normal levels for top tier cities like Beijing and Shanghai.

For example, consider that in Beijing and Shanghai volumes in the second quarter were only around half the levels compares to the historical facts. In the near-term at least we don’t anticipate that the policy restrictions will be losing.

We are also hopeful that there will not be any new restrictions as per current regulations are already very comprehensive and are being strictly enforced. We therefore don’t see an urge need for any significant change in the near-term, but we are confident that our current strategy gives us the flexibility to manage any potential impact.

Looking ahead we expect to see healthy transaction volumes over the coming -- over coming months, and we believe that we have the right structure in place to take full advantages of improved market conditions and we’ll manage our business to ensure the maximum productivity.

With that, I will turn the call over to Harry.

Harry Lu

Thank you, Donald. We record a strong set of results in second quarter as market events recovered strongly. Revenue in the quarter grew 53.5% sequentially to RMB200.3 million, which was well above the high end of our guidance.

In particular, we were pleased to return to profitability in this quarter with positive free cash flow. Our strategy for the latest several quarters has been to maintain a leading presence in key neighborhoods, while diversifying revenue streams. This has allowed us not only to maximize business performance during the market toughest periods, but also to take advantage of uptick in activities seen in Q2.

One key factor driving our good performance this quarter was our successful network optimizing -- optimization programs, which has ensured that we have a strong cost effective presence in key neighborhood.

In total this quarter, revenues from our company-owned brokerage services account for 86.6% of total revenues. We had total of 327 stores in operation this quarter in our company-owned store network, that’s around the same level we had in Q1.

As we have said, through the downturn we focus on rising per store efficiency. These involve shutting non-performance stores while retaining those that did well and broaden their revenue base.

As a result, we have been able to maximize the performance of individual stores while reducing overall costs. With much better market condition going into the second half of year, we will focus on growing our company-owned network organically in prudent manner.

Obviously, aggressively building the CENTURY 21 brand and nationwide coverage is a top priority long-term, and our franchise network give us ideal opportunity to do that in low risk and cost efficient manner. We were seeing significant interest from potential franchises, so we are confident that there is plenty of demand to satisfy our expansion need.

Recently in Jinan, the capital of Shandong province, we added five franchisee stores and we are assessing a range of options, particularly in major cities like Beijing, Shanghai and Chengdu.

A second key factor in our success, in our revenue diversification strategy, in particular, we are proud of our strong presence we have built in the primary market. This has enabled us to benefit from an increase in both primary and secondary transaction volume in Q2.

In primary home sales, our advantage is our unrivaled network, which means we can provide developers with access to a broad range of buyers. In total in Q2, 32.9% of revenues through our company-owned brokerage store came from new home transactions, which really illustrates the success of our revenue diversification effort.

The value developers placed on our network allowed us to secure a very favorable commission rates. This quarter, commission was around 2% for new home sales through company-owned network, which is above our average commission that primary specialists can command.

Going forward, we are aiming for primary transaction to account for somewhere between 20% to 30% of revenue from company-owned store network, while conditions in the secondary market has obviously improved, we believe it is vital to maintain a flexibility and capability that came with a diversified revenue base.

Now, I would like to touch on work we have been doing online. It’s very important for us. In fact, more than 40% of our business is driven by online activities. This quarter, we’ve made further progress in leveraging our online presence to drive growth across our network.

The formal launch of our real estate leading website, SouFun.com was a key part of this. SouFun is now clearly a brand as a Century 21 China’s initiative and it coverage all our listing information. Controlling our own site allow us to work more closely with our online team and to focus fully on driving sales and making the best possible use of the data that come from it.

So far, customer response has been excellent. We had a dedicated team of internet marketing specialists working on promoting our online listing, which drove 8% of sales in Beijing in second quarter. We believe this will make a big contribution to the efficiency of our network and we expect it to be a strong platform for growth in the coming month.

Our overall performance this quarter was very encouraging. The strategic foundation, we have laid are paying off and importantly, the various components of our business. Primary and secondary online and offline are working together in a complementary way to benefit from size and scale of our network.

Going forward, we’ll prudently manage our direct owned networks where it broadens our reach across key market through our franchise network. This strategy will allow us to grow in most effective risk-free way possible.

The online presence is a key factor here. It will continue to play a vital role not only in driving sales, but in providing us with the valuable information on buyer activities across our network.

So to sum up, we are confident that we have a strategy in place to raise maximum benefit from improving market fundamental. We are looking forward to build on our encouraging performance this quarter.

Now, I’d like to turn this call over to Kevin, our CFO.

Kevin Wei

Thank you, Harry. Now, I’d like to share with you our second quarter of 2012 unaudited financial results. The company’s total consolidated net revenue in the second quarter of 2011 was RMB200.3 million, representing a 53.5% sequential increase from RMB130.5 million and a year-over-year increase of 18.9% of RMB168.5 million.

Revenue from our company-owned brokerage segment -- service segment was approximately RMB173.5 million, representing a 50.7% sequential increase and a 23.3% year-over-year increase.

The sequential increase was mainly due to an increase in sales and purchase transaction volumes in the second quarter of 2012, as a result of a seasonal rebound, as well as the overall market recovery in Beijing, Shanghai and Shenzhen as mentioned in our release.

Specifically, we completed 4,842 sales in purchase transactions during Q2 of 2012 versus 3,102 transactions in the Q1 of 2012. The average number of sales offices in operation decreased to 327 in Q2 of 2012 from 340 in the Q1 of 2012.

During Q2 of 2012, we also had an average number of service sales offices that were temporarily closed. Our average monthly net revenues per operating sales office increased to -- increased about 56.6% to RMB177,100 for Q2 of 2012 from RMB113,100 in Q1 of 2012, excluding temporarily closed sales offices.

For the second quarter of 2012, company-owned brokerage services segment became profitable before allocation of any headcount expenses. The year-over-year increase in quarterly revenue from the company-owned brokerage service segment was mainly due to the increase in the sales and purchase transaction volumes of 4,842 transactions versus 3,766 transactions for the same period of 2011.

We have reduced the average number of company-owned sales offices in operation to 327 in Q2 2012 from 582 in the same period of 2011. As we know these factors, our average monthly net revenues per operating sales office for Q2 2012 increased to RMB 177,100 from RMB80,500 for the second quarter of 2011, representing a 120% increase.

Revenue from our primary and commercial business segment in Q2 of 2012 was approximately RMB19.1 million or 9.5% of total net revenue, representing a 114.6% sequential increase and a 92.9% year-over-year increase.

The sequential increase was mainly due to an approximately 76.8% right in new properties sold to 79,700 square meter GFA, including approximately 71,100 square meter GFA that were sold by our Shanggu business unit during Q2 of 2012.

For the second quarter of 2012 the weighted average ASP was 9,200 RMB per square meter, with weighted average commission rate at around 2.3% from the developers. The year-over-year increase and a high commission rate were mainly due to the incentive commission revenue achieved by Shanggu for two office building projects in Q2 of 2012.

For the second quarter of this year, primary and commercial business segment become profitable before accounting of minority interest and allocation of any headquarter expenses. Revenue from our mortgage management services segment in Q2 of 2012 was RMB6.2 million or 2.1% of total net revenue, representing a 61.2% sequential increase and a 5.1% year-over-year increase.

The sequential increase was mainly due to the increase in revenues from traditional home mortgage loans, brokerage as well as fees earned on home equity loans. We brokered RMB466 million of traditional home mortgage loans and 155 -- and RMB115 million of home equity loans to the banks in Q2, 2012 as compared with RMB298 million of traditional home mortgage loans and 82 million RMB of home equity loans in Q1 of 2012.

The year-over-year increase was mainly due to the increase in our average mortgage credit loan balance outstanding from RMB33.5 million in Q2, 2012 to Q2 -- Q1, 2012 to RMB43 million in Q2 of 2012 as well as a high interest rate and service fees achieved in the current quarter.

The percentage of revenue from advising consumers for home equity loans and service fees and interest earned from mortgage credit loans accounted for 67% of total mortgage service segment revenue in Q2 of 2012 versus 64% in the Q1 of 2012.

For the second quarter of this year, our mortgage management service segment achieved profitability before allocation of any headquarter expenses. Revenue from franchise services segment in Q2 of 2012 was approximately RMB1.5 million which accounts for 0.7% of total net revenue representing a 37.5% sequential decrease and a 87.5% year-over-year decrease.

The sequential decrease primarily a decrease in royalty revenues paid by some regional sub-franchisors in the second quarter of 2012 due to their poor performance. And the year-over-year decrease was primarily due to the high initial franchise fees recognized in the second quarter of 2011 as the company granted two new regional sub-franchisors at that time.

On the cost side, our commission and other agent-related costs in Q2 of 2012 were RMB115.3 million representing a 30.4% sequential increase and a 3.8% year-over-year decrease, specifically fixed salary and benefit costs of sales staff increased RMB1.8 million in Q2, 2012 from the Q1 of 2012 and a decrease of RMB23 million from Q2 of 2011. We had an average sales staff number of 5,140 in company owned brokerage segment in Q2 of 2012 as compared to 5,400 in Q1 of 2012 and 9,700 in the Q2 of 2011.

As to the variable costs, our total commission expenses as a percentage of total consolidated revenue for Q1 of 2012 increased to 32.1% as compared with 30.1% and 27.1% for the Q1 of 2012 and a Q2 of 2011. This increase is mainly due to the high commission expenses as a result of high revenue achieved by both company owned brokerage services and primary agency business segment.

Total consolidated operating costs for Q2, 2012 decrease by RMB8.6 million to RMB41 million representing a RMB17.3 million sequential decrease and 47.1% year-over-year decrease. During the second quarter of this year, we have incurred approximately RMB0.2 million write-off charges in sales office closing related costs. While such costs were RMB4.6 million in the Q1 of 2012.

Without considering such sales office closure-related costs, we’ve reduced the total operating cost by approximately RMB4.2 million in Q2 of 2012 from Q1 of 2012, mainly due to the savings in store rental and other store related expenses along with our sequential store reductions.

For the similar reasons without considering sales office closure-related costs, we reduced the total operating costs by approximately RMB30.7 million in Q2 of 2012 from the Q2 of last year. Total depreciation and amortization expenses for Q2 of 2012 was RMB7.2 million.

Our total SG&A expenses in Q2 of 2012 were RMB42.9 million representing a 2.9% sequential increase and a 17.5% year-over-year decrease. The year-over-year decrease were mainly due to a lower margin expenses because of less marketing activities and expenditures as a result of less sales offices and less sales staff.

Net income attributable to IFM Investments Limited in Q2 of 2012 was RMB0.8 million as compared to a net loss of RMB45.9 million in Q1 of 2012 and 80.4 million RMB loss in Q2 of last year, excluding share-based compensation expenses, goodwill impairment losses and net change in the fair value of contingent consideration.

Non-GAAP net income attributable to IFM Investments Limited for Q2 of 2012 was RMB1.6 million as compared to a non-GAAP net loss of RMB45.5 million in Q1 of 2012 and RMB79.6 million loss in the Q2 of last year.

On the balance sheet items, we have RMB174 million in cash as of June 30, 2012 increased by RMB1.8 million from March 31, 2012, including RMB39.5 million of short-term mortgage credit loans receivables outstanding as of June 30, 2012, we would have RMB213.5 million or US$33.6 million equivalent in cash and cash equivalents.

During Q2 of 2012, we generated RMB4.3 million positive cash flow from operating activities. Our net account receivable balance as of June 30, 2012 was RMB151.6 million increased from RMB122.1 million as of March 31, 2012. This increase is mainly due to higher commission revenue from the company-owned brokerage and the primary and commercial segment.

Our average AR turnover day is approximately 62 days for the second quarter of 2012. Now regarding the guidance for the third quarter of 2012 based on current market conditions that we detailed earlier, we are estimating our total net revenue for the third quarter of 2012 will be in a range of RMB196 million to RMB206 million. Now, this forecast reflects our current and preliminary views, which is subject to change.

With that, that concludes our management’s prepared remarks. Operator, now we can open for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Ella Ji from Oppenheimer.

Ella Ji - Oppenheimer

Congratulations on strong quarter. My first question is regarding your primary home sales, which now accounted for 33% of the revenue from your brokerage services. So could you comment on the pipeline of your primary home sales going forward?

And then my second question is given that the market has a rebounded and how do you think about your expansion-related spending in second half of the year, for example, the marketing related spending or sales force hiring et cetera? Thank you.

Donald Zhang

Hi Ella. The question about the new home sales through our company-owned brokerage segment, basically, we do not have a pipeline for sake but while we have experience in all of these, since the second half of last year. We have continuously to work with developers, a lot of these are on a non-exclusive basis through our sales offices network.

And we are experiencing as you already saw over 30% of revenue are now generating from such transactions. And we will continue to expect in a foreseeable future that we’ll continue to have a consistent revenue contribution from selling such new homes in a range of 20% to 30% every quarter. So hope that answer your questions in terms of the future.

Ella Ji - Oppenheimer

If I could quickly add, so in terms of, for example, the number of developers that you are working together with on number of projects that you will be selling in your brokerage stores. Is there any color that you can share with us in terms of the release?

Donald Zhang

I mean, having work with some of dozens of various types of developers in Beijing in a similar number, a little bit smaller. In Shenzhen, as well we worked with maybe more than two dozen developers in the past 12 months or so. So we’ll continue to be expecting to have a consistent base of the developers that will work with us, selling their new projects.

Ella Ji - Oppenheimer

Okay. Thanks.

Donald Zhang

Yeah. And your other questions about the marketing expenditure and the other SG&A expenses while we -- obviously, we don’t have any aggressiveness in store expansion plan as of now. What we have to talk about is obviously we’re going to have -- expect some organic growth under the current market environment.

So we -- our marketing expenditure normally fell consistent with the number of sales stock that we have, based on the 227 stores. Given the pace going forward that we may have some little bit organic growth in that area involved.

Right now, we do not have any expectation of significant increase in the market expenditure. Having said that, having already mentioned we have spent a part of our initiative in terms of online platform effort and will continue to obviously invest in an area in a way that is appropriate with our company growth.

Ella Ji - Oppenheimer

Right. Thank you. That’s very helpful.

Donald Zhang

Thank you, Ella.

Operator

(Operator Instructions) The next question comes from Joshua Hwang from Goldman Sachs.

Joshua Hwang - Goldman Sachs

Hi. Hello. Congrats on the great quarter. I had a quick question on transaction volume, whether you can comment on the total number of transaction you saw in the second quarter compared to 2011. And also I think I missed it though, what was the total average number of sales offices that you have opened for this quarter? Thank you.

Donald Zhang

Joshua, maybe the last question where you’re asking to confirm the average sales office number in the second quarter, which is going to be -- which was 327 with seven stores which were temporarily closed.

Joshua Hwang - Goldman Sachs

Okay. Great.

Kevin Wei

And your first question, transaction volume for the second quarter, we’re actually checked by month, right now, currently for the month of June and July in the city of Beijing, secondary transaction volumes are on about 14,000 to 15,000 and then in the city of Shanghai, you’re talking about roughly around 20,000 network.

Joshua Hwang - Goldman Sachs

Thanks. I actually, I know that you have published the market data for Beijing and Shanghai, what I’m trying to get to is our metric for our transactions per company-owned store and so that’s driving the number of market transactions but the number of transactions of CENTURY21, is it self processing?

Kevin Wei

Mr. Joshua, could you maybe clarify a little bit on that on your question you’re asking that the number of transactions that are for sales office and store each month?

Joshua Hwang - Goldman Sachs

Sure. So my question is on the number of transactions. So in our -- I think historically for 2010, there were 13,000 transactions.

Kevin Wei

Yeah.

Joshua Hwang - Goldman Sachs

Processed by your company over the year and there were total number of company-owned stores open. So I could calculate the number of transactions per company owned store. So what I’m trying to do is do the same thing for this quarter. Do you have that information available?

Kevin Wei

Yeah. We have 4,842 transactions over 227 stores.

Joshua Hwang - Goldman Sachs

Okay.

Kevin Wei

The number for the first quarter of this year were 3100 transactions with 240 stores.

Joshua Hwang - Goldman Sachs

Okay. Perfect. And sorry, last question was, I know the company-owned sales office of 227 and then there is an average store number of sales offices including non-company owned offices. Do you have that number as well?

Kevin Wei

Which is the -- are you referring to the franchise offices?

Joshua Hwang - Goldman Sachs

Correct.

Kevin Wei

Yeah. A total franchise office, including our company-owned did not expand cyclically is in our release for the quarter.

Joshua Hwang - Goldman Sachs

I’m sorry. That was 936.

Kevin Wei

Yeah.

Joshua Hwang - Goldman Sachs

Okay. Perfect. Thank you. Very helpful.

Kevin Wei

You’re welcome.

Donald Zhang

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. 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. Kevin Wei, for his closing remarks.

Kevin Wei

Thank you, everybody, for joining our call and questions. And we’re looking forward to hearing from you soon and talk to you again in the next quarter release. Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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