Direcional Engenharia SA

BOVESPA:DIRR3

Earnings Call Transcript 2023-Q1

[Paulo Henrique De Sousa, executive]

Good morning, everybody. Welcome to our earnings release. As always, we will begin our presentation talking about the results, and then afterwards, we'll go for the question-and-answer session [indiscernible] analysts and investors. If you want to ask a question, please use your raise your hand tool and we will moderate all the questions here [indiscernible] of arrival. Also, this video is being transmitted via YouTube. Those of you [indiscernible] via YouTube, you can get the link via the IR and we will give you also the link after this meeting.

Now I would like to give the floor to Ricardo.

[Ricardo Valadares Gontijo, executive]

Good morning, everybody. Personally, I would like to thank you for your participation here in our earnings release call, and I think this was the first quarter [indiscernible] first quarter in terms of financial results here in our company. So I would like to show you some highlights here that somehow have been translated -- has been translated by the numbers and the strategies that we have adopted in the different quarters and have shown now -- shown very good results every quarter.

Some highlights here, Page 3. Going through the sales volume that we had in the first quarter. Once again, it was a record in terms of sale, BRL 803 million in terms of sales when we consider our share and our other partner's shares in some of our projects. It's important to strength that this minority interest has been used. When you consider the launches in this quarter, there were 100% projects, of which our participation was complete. We did not have partners here. And when we analyze the last 12 months closed in March, we have the first time over -- exceeded BRL 3 million. It was BRL 3,180 million from -- to March this year.

Slide #3. Also, I'd like to stress our gross margin, which I feel is a differential here. Once again, our gross margin was very resilient in line in terms of percentage to the gross margin we had in the fourth Q last year. When we adjusted, we capitalized the financing interest rates because of our SPEs. Our gross margin was 36.3%, and this has been slightly over -- slightly better with regards to the level we consider recurring here, which is around 34%. We delivered 36.3%. And it's important to stress that we see a very benign scenario in terms of costs or increment of costs in our production. With regards to operational units, our gross margin level is comfortable and the scenario is less concerning than during the pandemic, specifically with our production rates.

So now going to Slide #4, I'm going to show you a series of points that I think it's important to draw the market's attention to. So here, we have noticed that the market has constrained gross margin. Of course, the gross margin is very important. But what we have tried to do and been able to deliver here is a very resilient, very consistent gross margin with a gross profit growth. So our revenue has grown very -- in a very significant way, and this has allowed us to deliver a dilution of our expense line, right, an expressive growth of our gross profit, which will be the last part of the highlights I would like to show you.

Slide #4, you see an important part of this reduction of expenses that we've had. When we analyzed the left part of the slide, the last 12 months, closed the first quarter '23 compared to the last 12 months closed in the first quarter last year. When we consider general and administrative expenses, a reduction of 4 points, right? So our G&A has been diluted in the last 12 months was 6.7% of our gross margin -- gross revenue. It's important to say, since we have sold more than what we had in terms of revenue, we have continuity of growth of revenue, and consequently, continuity of dilution of these G&A expenses.

With regards to sales expenses, here, we have a very important impact in the last quarters. Our sales, our commercial expenses went from 10.2% of the gross revenue in the last 12 months closed March last year and dropped to 8.8% in this first quarter. 140 bps, right, which is expressive. The first quarter, in an isolated way, our commercial revenue was 7.8% of the revenue and even more important reduction when compared to the last 12 months. And this is for several businesses. And part -- a relevant part comes from the growth of the share of our sales from our online -- of the participation online sales and also sales stores, which has been reps we have adopted for some time now, and that has allowed us to see the results, which is the reduction of these expenses.

The result of all of this and even selling 29% more in the first quarter '23 compared to the first quarter '22, commercial expenses was 3% below the commercial expenses 1 year ago. So we saw 30% more with a reduction of 3% here. As a proportion of the gross sales, which is an important analysis to do, commercial expenses this first quarter was 4.8%, which is a very low level. And also, it's important to do a disclaimer here. Of course, when we compare the first quarter '23 to first quarter '22, we had the seasonal impact that happens, right?

But since in the first quarter, January, March is more -- it's stronger in terms of sales. Expenses with commission, in general, occurs 30 days as a difference with regards to sales. So it happens in April. Although this level has been very competitive with very expressive gains relative to '22. When we look at the next quarters, we can see that as a proportion of the revenue, our commercial expenses will be slightly more than what we delivered in this first quarter because of these that I just explained to you, right? Expressive happens the following quarter.

Slide #5. We have always said, we have always stressed, we've made huge efforts in the last quarters to concentrate our execution capacity in [ those ] projects, of which Direcional's participation has been great, projects where we don't have partners. So you can see here clearly that the minority interest line has had an important reduction in our financial statements in the last quarters. When we compare the first quarter last year to this, there was a reduction of 4% of the revenue to 2.4% of minority interest. Another 106 bps gains year-after-year.

And as a consequence of this dilution, everything I showed in the previous slide, and this one, you can see that our net margin before minority interest reached 15% of this revenue this first quarter, which was a gain of 340 bps when compared to the first quarter last year. So this is an effort we've done. This is what we have been trying always to show the market. And now we have -- we've seen the results here.

So Slide #6, now going to the net profit and Direcional participation in the project, you can see here, once again, with all the effort we've done in terms of pricing of the product, a control and standardization, which is extremely rigid allowing us to do our projects here and also the growth of revenue, diluting expenses, which has grown in proportion much greater than the expenses, right? And also, reduction of the minority interest, we have in this first quarter, been able to deliver almost 100% of net profit compared to the quarter '22. So I think that this is very significant. 96% growth of net profit adjusted by the sale of receivables from pro-soluto, right? So only [ BRL 100,000 ] million [indiscernible], but very expressive year-after-year.

And here it's looking very gratified. After a long time, we have been able to overcome the level of 20% ROE. We have delivered a 21% annualized ROE, which is for us very relevant and somehow has showed that the work our team has been doing and the strategy that we adopted in the last year has generated much value to our shareholders. So I would like to use this moment to thank all of our team, all of their efforts, everything they have been doing and say to everybody that this effort has been translated into the numbers that have -- are really worth it.

Now I would like to give the word to Paulo, who is going to show [indiscernible] Paim will talk about the financials. And we'll be at your disposal of questions and answers afterwards. Paulo, you have the floor. Thank you for your patience in this call.

[Paulo Henrique De Sousa, executive]

Thank you, Ricardo. I would like to begin talking about operational data launches. We launched 9 projects, EUR600 million as a result of this share, 78% with Direcional, 22% Riva. And it's important to stress that the first quarter usually has a seasonal effect because it's slower in terms of launches. We had come from a strong fourth quarter, we launched more than EUR1 billion. And so this is common. Last year was the same. We launched almost BRL 600 million. And during the year, generally, we increased the number of launches and try to reach our plan here. 12 months, when we come [indiscernible] to the side, BRL 600 million, BRL 3.6 billion in launches, this was a growth of 15% when compared to the same period in '22.

Lastly, looking to the right here to the chart here, and we can see evolution of launches since 2016, we can see some relevant growth in [indiscernible] what Ricardo said, and this already considered '23, all right? So here, we're saying, we've grown 24%. And in 2023, we are repeating '22, 24% a year since 2016, which is very expressive and reflects our work.

Next slide, sales. As Ricardo said, we have the best first quarter in terms of sales, BRL 803 million, 29% growth compared to the first quarter last year, 16% relative to the fourth quarter. This is very rare, a company to have a first quarter in terms of sales that is better than the fourth Q, and we were able to do this, this quarter. We began very well this year. Important to stress that Direcional and Riva, we were able to grow in both businesses -- both companies. And even because -- even in spite of complex scenarios in terms of interest rates for Riva, it also grew well in the first quarter. 12 months sales, we grew more in sales in terms of launches, 25%.

And as Ricardo said, the first time we went over, we were able to exceed BRL 3 billion. This growth in sales because of the business cycles, we launch, we sell, and build. Since our revenue comes with construction, it is to be expected this growth in sales now will drive revenue growth in the next quarters because we will begin constructing and accelerating the works. So somehow, we are tracking here growth of -- we expect a growth of revenue in the next quarters. Into the right, we have an even more relevant growth scenario in terms of sales, 30% a year since 2016 to today, we multiply by 5 the company in this period. It's just amazing what we have been able to do here.

And lastly, to talk about net sales speed here, these sales helped us our sales speed. We were able to grow this in both segments, Riva and Direcional, and consolidated too. We were able to grow 2 percentage points compared to the previous quarter. And go back to the average of the last quarters in line with our strategy for the year. We've already mentioned this in our earnings release, right? For 2023, consider what Ricardo said, we have a more benign cost scenario and capital costs. We are at the moment of capital costs, right? So we should go the gains in its net sales fee when we consider the first quarter and the next quarters in order to be able to increase the [indiscernible] working capital, right? We are [indiscernible] with our margins. We see cost scenario that is more benign. So we will go up the working capital also as well as dilution expenses and the working capital to contribute for the reduction of expenses. And this should be [indiscernible] will go after results for 2024. This is what I wanted to say to you.

Now, I give the floor to Paim, who will continue with the financial highlights. Thank you very much.

[Henrique Paim, executive]

Thank you, Paulo. Thank you, Ricardo. Good morning, everybody. Thank you very much for your participation in our earnings release related to the first quarter '23. We are very happy to show you to present to you [indiscernible]. This was a very challenging quarter, but we saw [indiscernible] capacity to keep to what we arranged to have highlights in results, [indiscernible] simple in business, be very focused as owner of the business, right? And this reflects everything we are showing you here today. Direcional [indiscernible] years old, right? And the capacity we invented itself during all the cycles, all the market changes that have occurred and also demonstrating an important competitive differential and to be able to comply what was arranged.

So now we will show you the financial highlights of the quarter. To the left of the slide, we can see net revenue, which reached an important growth the last 12 months added in the first quarter '23 When compared to the first same period '22, the growth was 23%. The growth of the net revenue would not consolidate, it was very strong, 27% growth. So this demonstrate our capacity, as we said, we launched -- we [indiscernible] important growth period in terms of launches, launches us very assertive and has converted in sales. And these sales with the advance of the works will translate into revenues. It has been converted to revenues. So in the next quarters, we shall see, as we can see in this quarter, a growth -- an important growth of revenue.

And also, we [indiscernible] a long-term track record like the advance of our revenue since the first quarter '21 here to the right [indiscernible] first quarter '23 as an example, and also considering the first quarter '22 last year with this last quarter, the last 12 months, we have had a 23% growth in the net revenue of the company. This will continue happening. The effect of the revenue is given. There is an important also future results are already constructed, right, or yet, and we don't want to generate inventory, right? So this revenue will happen. So that further on in the pipeline, we can get to speed, which will be launch equal to sale equal to revenue, but it will take some time still to get to this level.

Also, you can observe here an operational result through our EBITDA, which is very positive, right? We reached BRL 121 million compared to the first quarter, 25% growth, right, the last 12 months, '23 versus the same period, '22, 16% growth. EBITDA margin, very healthy, very solid. One of the greatest in this sector, right, almost 21%. And when we look at the retrospective, more longer-term retrospective, parting for the first Q '21, consistent improvement of the EBITDA margin and a nominal number, BRL 121 million in EBITDA. And this means that we have BRL 290 million in net debt. If we analyze this BRL 121 million, we have less net debt over the EBITDA. So this is very comfortable in terms of capital leverage.

We have always said in the last years that we -- our decisions, right, is based on leverage and sustainability of the business depends on this long cycle sector, right? Brazil has its difficulties and its right. And we have to have the capacity to have hefty buffers in order to be able to protect ourselves. So this is an insurance that we have to have a solid capital structure [indiscernible] and here to confirm everything that I mentioned and net debt in parting from BRL 193 million [indiscernible] in net debt refers to payment of dividends we did on the 9 January, BRL 104 million. We still have BRL 1,072 million in cash. This will be able to do for the next 4 years of growth maturity of the debt. And you can see that less than 35% of our total indebtedness is over 48 months. So liability management is very well done here so that we don't have any kind of extension in the next years, right, so that we can be very comfortable here with this indebtedness.

To the right, we have the capital markets, which continues being our main financiers. The CRI institutional investors, and we have this -- we have millions of investors buy our credit securities, credit bonds. And to close the presentation, our AAA was reaffirmed by the S&P 2 weeks ago. So today, we are one of the few companies in Brazil with a AAA rating in a local scale, a very stable outlook. So even in a very challenging scenario with everything that is being discussed, we still have a vision of our global raters, the agencies that raters have a very positive view of us, which is our way of doing the business from here, right, which is walk the talk.

Now, we will go to questions and answers. Thank you very much for your participation here.

[Paulo Henrique De Sousa, executive]

Okay. So now to begin our questions and answer. The first from Bruno Mendonca, Bradesco. You have the floor, Bruno.

[Bruno Mendonca, analyst]

Ricardo, it's impossible to skip FGTS, right, the theme. Can you share with us, tell us the strategic discussions -- the internal strategic discussions you've had vis-a-vis the potential changes? The idea is not to speculate what you see in terms of decision. I want to understand your mindset here in a more restrictive FGTS scenario, specifically demand contributions from the government here. So 2 fronts here. The first is product mix. We very recently had a clear expectation that it would be possible to go down the [indiscernible] increase net sales. This would depend on subsidiaries, which is not so obvious. That's my first question. So how do you imagine the mix -- the evolution of mix here in this more restrictive FGTS scenario?

And then capital structure. You've been doing selling here receivables portfolio, which you have been able to accelerate dividends, which is good. But in this scenario of these subsidies, we -- once again, we go back and have a risk of a bottleneck in terms of transfers, right? And the companies need an extra buffer here in terms of balance. So how would this more restrictive scenario do here? Can you continue here? Or would you become more conservative?

[Ricardo Valadares Gontijo, executive]

Bruno, it is difficult for us to know the results of the FGTS, I think it's important for the consequences of this decision from the Supreme Court be very clear to all ministers so that they can vote on this and know the impact that this can cause because in practice, what is happening in order to pay more in a greater volume of deposit since this payment is done based on the deposit. One is -- one can impact the program in a relevant way, hindering or jeopardizing most of the quota holders that have slow deposits with low wages. And in practice, they would lose the benefits of product subsidy benefits and lower interest for the old homes. So that -- and a higher payment for a small share of quota holders that have the greater volumes deposited and they don't need a fund or any kind of subsidy, right?

So indirectly, this is a decision, and in case one maintains what happened in the last 2 votes, you are withdrawing from the lower-income people to pay more to those that have greater income, which seems to me very contradictory from a social point of view and there is an impact, which goes against what one expects when you have the payment of the deposits because one didn't say who would pay the accounts here, right? It simply was decided that the payment would be higher. But this is being paid by the lower income people. People work that have less wages unfortunately. So it seems to me that the consequences are not very clear with regards to what is voted being voted on, right? There is some kind of information. It seems very partial with regards to this.

So we're working with this scenario, with this information, becomes to be more disclosed right publicly. I don't think it's very obvious to everybody, right? FGTS, a certain distribution of income that exists there. And I think that the government in this sector has tried to show us this impact and the consequences that I believe is not [indiscernible] notices in the first analysis, right? So we are working in a scenario where the program remains without great changes. Most of our land lot was acquired via swaps. It is not that we have an extremely relevant cost here. If the program remains as is without huge adjustments in terms of subsidies or whatever. So we -- it is obvious we would like to see to the lower income layers. But if this is not possible, it is not that we have such high capital exposure, and we have longer time for this capital to return to the company.

Land lots were acquired in the most part via swap. So I don't see such an expressive impact in terms of our returns. But of course, we would like to be able to work with the lower income layers, and we're trying to work to see if there is no change. If there is a change, even so, I believe that, based on all our analysis, I don't think there will be a huge change in our segment. There might be a change in the growth pace of our operations. But here, we will have greater cash generation. We will be able to return capital to the shareholders. In effect, we'll wait and we'll be able to -- and we'll have to adjust our equity based on the new reality.

I think -- if we don't have so much equity allocated in land, we wouldn't be operating below the capital cost of the company, never. This would not be an ideal scenario to return more company, right, more capital. If we can invest, allocate this capital in the return rates we have allocated, but this depends on the perspective of us having a customer base to buy these recent volume of products we have offered. We are focused here. We are aware of this. When the judgment is done, when the vote is taken, we will see how to adjust our operations and our capital structure to continue generating value.

It's important to say that we won't have a change in the program because this is a priority for the government from a social point of view, generation of jobs, collection of taxes. So there are many benefits for the society here. With regards to actions and value generation in our company, we do intend to continue monetizing assets once they are mature because this is the moment that discount rates for the monetization of these assets is the lowest. So we have been selling receivables portfolios. In the fourth Q, we saw 3 SPEs. It is natural that here they become consolidated in our financial statements, right? We anticipate cash generation and profit of projects and the remaining share that we have goes to our balance through equity equivalents here. You see this growing quarter-after-quarter.

Numbers for you, which I think is interesting. These 3 SPEs would have a revenue of almost BRL 40 million in [ 35%, 36% ]. So it's natural that our revenue has been impacted by the sales of this project, but the profit came last year. So now the remaining share that we have goes into the line of equity equivalents. So we want to continue with our work line in the same way, discount rates by the market to acquire our assets. If they remain in the same levels as last year, we do intend to continue monetizing these assets. We are delivering year-after-year revenue growth, quarter-after-quarter, close to 30%, which is very expressive in a capital-intensive sector.

Returning expressive capital amount to shareholders. Last year, BRL 170 million in dividends and buyback of shares, growing revenue 30%. So we have been able to generate value, deliver an annualized ROE of 25%. And now to answer your question, we are not in any decision here until we wait for the results here [indiscernible]. But since we have to work, I don't think we have to be more conservative here, independent of the decision. Either we will continue with the pace growth of the operations, but I want to make clear to you, the idea is to return more capital to the shareholders, and we want to continue doing this work and work with a book size that allows us to generate satisfactory returns.

And as Brazilians, it is important to have a popular program. And I believe that the consequences of this decision has to become clearer to everybody involved in this process. And we believe that this can be reverted. The FGTS can continue being a financier after lower income families. And I think that this is very important for the company and operations would continue the same. So nothing changes. Okay, Bruno.

[Paulo Henrique De Sousa, executive]

Thank you, Bruno. Next question, Elvis, BTG.

[Elvis Credendio, analyst]

Two questions here. One, about Minha Casa, Minha Vida changes. There is an expectation of new very positive measures for the program. But with all this discussion involving the change of FGTS deposits, I want to understand that this should impact the announcement of these changes in terms of timing and the size of these changes that you were expecting, right? The second question, sales log. If you can mention more about the evolution of the sales pace in April and May in Casa Minha, Vida segment and Riva segment, you will continue with a good pace, right? So also understand that the interest rate increase from cash has an impact reflects on Riva.

[Ricardo Valadares Gontijo, executive]

Elvis, in principle -- we, in principle, believe that certain changes were necessary and expected by Minha Casa, Minha Vida, independent of the STF decision, we believe that they can be announced. And of course, this is not under our control, but independent of the gold or the judgment since nothing has been defined yet, one doesn't know the results. But the changes can be announced adjustments in order to somehow have operations several cities right, where the price has become unfeasible. Specifically, in North and Northeast, where you have a lag of prices and you have greater deficit -- housing deficit, right?

So I believe announcements can be -- changes can be announced, and I believe it can be. So we have to wait for -- to see the decisions that will be taken with regards to adjustments. We believe that independent of the decision, adjustments won't have so much impact in terms of subsidies. Now, the financial health of these funds where these adjustments could have to coexist with certain changes, right? We have to wait for the changes. And once again, I always stress, the program is going well. It's not that an adjustment here is necessary for us to have an important impact in our operations. Everything is going well. The operations are going well. We see solid margins and returns, which justify the continuity here of our projects in the program. And we are following our operations independent of adjustments.

With regards to sales, our April was very good, the first quarter was very strong, the fourth Q wasn't so strong. And in our vision, could have been the results of the World Cup and the elections and the sales that didn't happen in the fourth Q came strongly in the first Q. So we didn't have -- we had -- we've had some launches in the beginning of May happening. So April was a continuity of sales of products, which was in our shelves, right, available for sale. It was a good sales month. But when you have launches, then you have certain peaks in terms of the sales of property, right? But compared to the previous periods, we didn't have a launch of products. Well, we continue and everything goes -- is going as expected. I think May will be important because we have relevant launches in the company.

With regards to interest rates from the cash. When rates rise, it impacts the purchasing capacity of every customer. But in our Riva operations, we have a strong concentration of [indiscernible] production in the Caixa. Even with the rise in -- raises in rates here, we want the bank to have results in these operations that would justify the continuity of the bank in this segment. [indiscernible] not adjusting interest rates is not have the credit. So it is important to have this adjustment. It's not ideal, but it's a reality. So -- and also, it is started to have the illusion that the costs are lower, but you don't have credit here available.

Since our operations has an important volume in the Caixa, still after the adjustment, Caixa has the best and more attractive interest rates, right? So our Riva operations as well as offering a product to the client with very competitive cost. And this allows us to offer products in noble areas with very competitive areas. When we had the launches from Caixa, still we have rates that are lower than private banks. We have a differential with regards to the market because what one measures here is not rate interest rates, but the fact that Caixa is still the most competitive bank. And since -- and here, we can offer rates that is the most competitive in the market because of this. So we've seen a continuity for the demand of Riva products.

You saw the growth of Riva products in the first quarter compared to the -- and also the fourth Q and -- also. So we still have a demand for Riva product. We're more cautious here because of this scenario. However, we have noticed we haven't -- it is natural for one to expect growth in this segment, inferior to the Minha Casa Minha Vida segment, which has performed very well. Okay?

[Paulo Henrique De Sousa, executive]

Next question, Ygor Altero, [ XP ].

[Ygor Altero, analyst]

How do you see the criteria with cash recognition in the units here, leverage impact, and also an update, if you know, who's going to operate the program, if it's going to be Caixa [indiscernible]? What is the risk that you'll see here in case [indiscernible] operates this? Basically, this is my question.

[Ricardo Valadares Gontijo, executive]

Okay, Ygor. I'm going to answer your first question first, which somehow has been recurring. Of course, it's the first time that we're working with this format, right, the [indiscernible] program, which was very successful program. It's amazing, a huge supply in several cities. So you have the option of pulverizing this, choosing those projects that are most adaptive to requirements of the -- requirements here, but we don't see the risk. It makes no sense. We don't see risk. I think they showed it all the niches that could have emerged within the conditions that were announced here. And every time -- first time things happen, there is an adjustment, but it's a very successful program. We don't see a risk.

With regards to how to operate and how we will consider this, it is difficult to say at this moment. But independent of what happens, I would say, on a management point of view, how we're going to disclose this to the market. In our point of view, you have -- you received the land, and this is cash and for the company. The other installment, although there are in escrow in the name of the company, the SPE or the holding, whether is the winner of this public notice. This is cash that is locked and we'll have a cost linked to that cash position, stuck to it. So in our position -- in our vision, we should do an important disclaimer here because the cash here is we would have huge cash generation in the first quarter and burning the cash in the last 20 months, should be horrible in terms of volatility here.

So in our view, recognize 15% cash generation, and the rest, we will account for. We would do a disclaimer for the market because we should be recognizing our gross margin of the project. But once the project advances, and also with regard to the advance of the works. And this is how we believe we would disclose this to the market so that we can have the least volatility buffer, which is a healthy way of working within the program.

[Paulo Henrique De Sousa, executive]

Next question, Fanny, Santander. We can't hear you, Fanny. Fanny, we still can't hear you. So I'm going to go to the next question and the next person. Fanny, I think you have some kind of problem with your audio, with your microphone. So now, I will give the floor to the next person and then immediately I will call you.

Next question, Pedro, CS.

[Pedro Hajnal, analyst]

So can you hear me?

[Paulo Henrique De Sousa, executive]

Yes, we can hear you.

[Pedro Hajnal, analyst]

I have 2 questions. One, which is a continuity of the first questions as well as FGTS discussion, also, parallel to this, an increase of the cap of the program is being discussed. So what is your expectation that come from the increase of this cap? And also, from the Riva project, how do you imagine you can readapt them to the program in case there's this cap increase? Second, with regards to the savings in terms of works, you have the practice of recognizing economies in more advanced projects, right? So the projects that are ongoing, right, and will be in the financial statement this year. So how much percent of the -- what is the percentage of projects where you can have savings here?

[Ricardo Valadares Gontijo, executive]

So the last part of your question I didn't get. I don't know if you were going to finish your question or was there any other point?

[Pedro Hajnal, analyst]

No, I stopped.

[Ricardo Valadares Gontijo, executive]

Okay. Cap increase, it is difficult to know exactly the potential measures that were being analyzed that would be submitted to the approval of the Board, right, and then to see what will be implemented. It is difficult for us to make any kind of forecast here because we don't know what's going to be announced, percentage of increase that we'll have, if it's going to be concentrated in a region or other, it is difficult to know the impact because you're very right, the geographic dispersion of increases and how this is going to happen, is it going to be [indiscernible] metropolitan regions, it's difficult to know until this -- the announcement is made, but several Riva products could certainly be adapted to this, no doubt. We're considering 5%, 10% over the cap of the program. Also, several Riva projects where we've made adjustments in products, so that projects previously destined to the [ SBPEs ] fit into the market. We've done this with several products. And these projects would be more feasible, right?

It would be easier to allow for this product within the program. So I think it can have an important impact on our Riva products. But I prefer not to think about a scenario because we don't even know -- we don't even know if there's going to be an announcement here. If there is an announcement, we would try to show you what we are seeing. I think once again, it's not necessary. It is not necessary the operation, and it's not necessarily in the sense that in terms of return of the capital that we are allocating in the project. These are upsides on a base scenario -- well, base scenario we're working with. Our programs have been doing well. You've seen our results. So it's not that there is a need to make changes so that we have expressive improvements in our results.

I think there would be very difficult improvements that would have been done, right? Savings, we are in a more benign scenario in terms of costs. We've noticed cost reduction with certain products. We try to recognize certain savings, specifically when they go over 70%, 80% of the work because of volatility we've seen in the world as a whole in the last years, it's almost [indiscernible] healthy to recognize economies today and then losses in the pipeline, volatility in our results. So we eventually try to recognize these savings when they happen. And we are sure that these savings are certainly materialized. So for this year, it is not something that we have in our scenario. These are projects that are beginning now because the projects that will be delivered this year will overcome the 70 -- the ones that go over the 70%, 80% advance -- in the beginning of last year, right?

So there were expressive increases here, right? So we don't see expressive savings here in these projects. And eventually, the savings will happen with projects being launched now that are -- did have cost maintenance in nominal terms, right? And the delivery will be next year. So this year, we don't see savings. This is something for '24. But once again, Pedro, our margins have been very solid that we have been delivering. Always over what we try to show has been recurring 36.3% gross margin. In our point of view, it's extremely solid. And what we see today are healthy margins and somehow a certain comfort with regards to costs, challenge capital cost, which is huge. It's very high.

So we're going to focus in speeding up our sales, cash generation more than in gross margin, which is already at a very healthy level. So we're going to allocate less capital in projects and try to have an increase in working capital of the asset to generate value here, which will be proportional to margin gains, which will come from prices for very positive economies. But we see here this via a gain of working capital, right? If there is margin gains, great, we will work for this, but it is something that we believe that we will see this next year. So I think it's too early to imagine something now.

[Paulo Henrique De Sousa, executive]

Now we'll go back to Fanny. Let's try the audio now to see if it works.

[Fanny Oreng Avino, analyst]

I'm sorry, everybody. Paulo. I have 2 questions, commercial expenses. Ricardo, I want to understand if you're doing something different here with regards to Internet sales, online sales. And also, what do you think is reasonable in terms of commercial expenses as a percentage of the revenue or sales for next quarters? That's my first question. Second question, based on Pedro's question relative to cost, how do you see the cost of concrete because of the drop in diesel prices? It would be interesting for you to talk -- give us a perspective here.

[Ricardo Valadares Gontijo, executive]

Okay, Fanny, with regards to commercial expenses in this first quarter. When we compare the first quarter to the first one, we removed seasonal issues where you have, as explained here in our highlights, right, in the beginning of the presentation. We have sales concentrated in March, although January and February was strong, but March was even stronger, and payment happens 30 days later in April. [indiscernible] had this effect. It's important to say, naturally, in the first quarter, we had a lower volume of launches because in the third and fourth Q last year, we had an expressive volume of launches.

So I think it's healthy to have sales that are greater than launches, reducing the inventory volume that we have available for sales. And because of this reduction of launches, it is natural for commercial expenses, specifically with marketing, there is a reduction here, right? So when we compare the first quarter this year to the first quarter last year shows the efforts we've taken and the results we're having here because of these efforts, specifically the concentration of sales in one single store and also online, which is a huge investment that we do. But after it is done, it is translated into benefits from a commercial expenses point of view, right? And this has clearly been [indiscernible] here.

However, when we analyze the second and third quarter, the rest of the year, it is to be expected that our launch volumes will go back to a more recurring level over what we had -- greater than what we had in the first quarter, right, which is seasonally weaker. So we should have greater launches. And the commercial expenses line should not be in the same level as the first Q, perhaps a little more than that, right? It is difficult to say because it might vary quarter-after-quarter. It is difficult to assess this, right? But I would say that commercial expansions should go 9%, half -- 0.5 percentage points, right? 0.5 percentage points, which is healthy just to what we've done in the last 12 months closed in March. There might be some [indiscernible], right? We're working hard here to do this. But we're going to try to do a test, but I think it's prudent to consider something in keeping with what I said, to be conservative here [indiscernible].

With regards to material and product, you have to be more specific with regards to concrete. It's a cement, which is kind of perishable. It can't be stocked for too long, right? There is moisture, the cement will become rocky. So concrete has a more located kind of behavior. It's a locational type of behavior, right? It depends on the region. But last year here -- last year I think it was surprisingly high, right? But since the end of last year, we've noticed a cost reduction in concrete and the maintenance of price, right? There hasn't been pressure here -- cost pressures here. And until now, we've had a more -- like a reduction of costs.

But concrete, right, you have freight, all the way to the work site, transportation. And sometimes when drop -- prices drop, we have a reduction of freight because freight is part of the cost, right? And we've been optimistic here with the idea of having a continuity of the reduction of concrete price in case the diesel price reductions remain, right? So when there is a reduction, this is very positive toward the maintenance of our gross margins to remain at solid levels.

[Fanny Oreng Avino, analyst]

With regards to labor and costs here, is there something that draws attention here?

[Ricardo Valadares Gontijo, executive]

Fanny, your sound, your volume wasn't very good, so I didn't quite understand what you said. Labor, I think it's going to be like -- it depends on the price bargaining, right? We have [ de Sousa Paulo ]. We're going to see how this is going to be. We have a scenario which is concerning. I see a reduction in the size of the market as a whole. I'm not saying that this is going to have a relevant impact with Riva. I think we're going to have a reduction of seeing some companies that is not going to [indiscernible]. But when we consider the market as a whole, I don't think the scenario is very positive for civil construction. When you consider all the segments that exist in the market, I think the civil construction tends to reduce in terms of size with regards to next year.

So I don't think this -- in terms of labor, it shouldn't be a problem. But this allows -- this bargaining to be close to the scenario we're working with to wage bargaining to be working with. And also, what we have noticed in the last months, when we analyze the INCC labor having adjustment over the material. So when we define this, when we -- now this scenario has inverted, labor payment over material. When we analyze the constructive process that we adopt, where productivity is greater, a man produces more, it is natural that we gain competitiveness when the material rises -- when the price of materials rises in a lesser way than labor prices. So I think this is the whole scenario we're working with, gaining competitiveness in the last years which was happened before the pandemic, trying to industrialize our construction and trying to get the benefits of investment in capital, less -- versus less increment in costs with the idea that the labor prices will rise more than the prices of material of products.

[Henrique Paim, executive]

Just to add to what Ricardo said with regards to commercial expenses, so since the units are already sold, when we look in the future, we should have additional dilution of commercial expenses because it's easier to develop product, less G&A, less commercial expenses. So it's going to be in this window of the program, we should have a greater dilution here in this future.

[Paulo Henrique De Sousa, executive]

Next question Hugo from Citibank.

[Hugo Grassi B. Soares, analyst]

Congratulations for your results. I would like to ask, to delve into this theme with regards to what Ricardo talked about Riva, the possibility of Riva being separate from Direcional. The segment has [indiscernible] but you talk about the lack of financing and the role that this might happen right. Riva has access to credit, but I want to know how you see the competition here? This is the first question.

Second question as well as cash, including the low-income families. We depend on the Supreme Court and the measures of the Federal government. But I think cash is a player that has influenced the conditions for origination and you're going to have a new person nominated here, Luis [indiscernible]. So I'd like to know if you've seen an evolution in the cashless position here? And also the FGTS, you have all the approvals here. So perhaps [indiscernible] Ricardo, can you hear us?

[Ricardo Valadares Gontijo, executive]

Yes. The last part of your question was -- I didn't get. There was -- it was very choppy. I'm going to try to understand. I'm going to try to answer. And if something is missing, I would try to add to this. First part, competition in the Riva segment. What we've noticed very clearly is that banks have tried to focus [ FDPE ] resources, which we know -- it's more in the granting of credit to finance individuals that acquire real estate from a project of which financing for construction was done by the bank. So it is natural.

Banks want this -- the payment of this debt by the developer, they want this to be migrated to people. And somehow, it pulverizes this risk with the different buyers. And the market is more -- is healthier and eliminating risks here. I think this way of doing things is very healthier. It's like a soft landing vis-a-vis less available spending conducts because of the higher interest rate. I think it's very proven. So we've seen less credit in the company and more focus on the individual and we believe that used property is also being chosen by banks, which I think is a very healthy scenario here -- very healthy movement here.

We've seen here very good performance in our Riva product and I hope to continue with the performance, because in our vision, the supply of this segment, we've seen companies more cautious here before placing a product from the [ SBP ] segment to sale. So I'm more optimistic with the soft landing scenario, more than one where we can have a more abrupt impact with greater restriction from funding coming from the Map 4 of banks. I think the scenario is even better than what we imagined in the beginning of the year.

Caixa, we haven't perceived. I think this was a transitioning Caixa, which is just amazing government transition, President, Vice President with no trauma whatsoever in the sector with regards to companies and the credit of individuals granting. It is natural for rates to rise here because of more expensive bank fundings and selectivity from banks because of greater defaults. But I think nothing is being done. Nothing is different than what is expected. So we certainly see a lot of cautiousness here with Caixa so that we can continue working with the same depot levels, guaranteeing the property when there is granted that it can return guaranteed returns.

So we do not see any significant change here in Caixa. I think it's the same as always existed, same level of efficiency. Amazing when we talk about operational segments here in cash, right? But no change -- recurring change -- no change because of change of teams. The technical team is very competent, very solid. So certainly, we see something that is very consistent here in terms of work. So this person has a lot of experience, this new President. And I'd say that the new CEO of Caixa. I think it gives us a lot of comfort because of the experience this person has and also the technical experience.

[Hugo Grassi B. Soares, analyst]

Ricardo, a follow-up, FGTS, the consigned FGTS. There were some technical issues, but we had believed that they would be concluded and available in the market. Do you have an update or some kind of perspective here?

[Ricardo Valadares Gontijo, executive]

So in my point of view, no. I think the consigned FGTS in the first analysis is one of the measures that could co-exist with this decision of the Supreme. It is a measure that includes lower income families within the program, but it could also co-exist with the decision of the Supreme. So when you have a greater volume of companies buying property, re-buying houses, you'd have a greater volume of subsidies here. You'd have to balance this, right? But it's an issue of priority here. If the government -- what does the government want to prioritize? Less income, families.

We have to see, we don't know the priority at this moment, but it co-exists with this. And up where I know, this depends on adjustments in the drafting of the law that approved -- that passed the consigned FGTS last year. And when -- if one is going to implement what was passed by the law with the drafting last year, there's a huge effort here to make this adjustment here. And this adjustment is being addressed and this will allow for the future FGTS implementation process be simpler here.

Imagine a bank operating with the volume Caixa operates with the challenges that you have with IT when there is an expressive change here. This is the information I have. It is nothing related to the FGTS. And we do hope that this measure has the capacity of including many families that are not in the program now. So from a social point of view, it can have a huge impact. And we will wait for the drafting of the law that approved this law last year. We will wait for this adjustment to be made.

[Paulo Henrique De Sousa, executive]

Next question, [ Maria Angela ], Itau.

[Unknown Analyst]

A question about leverage. We noticed the value went from 13% to 19% because of payment of BRL 100 million in dividends. What about the company for new payouts in the year? And can you give us more details on these compensation programs?

[Ricardo Valadares Gontijo, executive]

[indiscernible] can you do that one?

[Unknown Executive]

With regards to leverage, if you've been following up on this amount, you will notice from a cash generation perspective, leverage reduces, it converges to something close to 10% of net debt over equity. And since we believe that 10% is under leverage, although 20% is too, we distribute these dividends or buy back shares to go back to a leverage which will generate 20% of net debt over the equity.

So if you look at our track record, you will see this movement cash generation reducing the size of the debt as getting to 10%, 11%, 12% equity and then paying dividends or rebuying shares, returning money to the shareholders. These are very long debt. For example, the last one was settled June -- July last year. It was a 10-year debt, 9-year average price. So CD plus 122, CRI 400. So these are very long debt, long liabilities such that we don't have a role. And capital management is this. We paid dividends and it help us when we pay dividends. It reduces the equity too. So we don't have an increment of PL, which should be an offending here in our ROE. We are able to operate with a fairer equity and we maintained ROE over 20% a year.

[Unknown Analyst]

Cash generation. You generated BRL 8 million this first quarter, right? Can you hear me?

[Ricardo Valadares Gontijo, executive]

Yes.

[Unknown Analyst]

One last question, cash generation. You generated BRL 8 million. Can you -- is there a perspective of going to the last 12 months of 2019? And what are the expectations with regards to the rest of the year with regards to cash generation?

[Henrique Paim, executive]

This is a year when you analyze our sales volumes of the last 12 months compared to our revenue level when you consider volume of launches that in the last 12 months, BRL 3.6 billion. When you see our revenue, I'm going to talk about gross revenue, BRL 3.6 billion. Now you see that the volume of sales and launches is still very much superior to the revenue. Our revenue is fruit of the evolution of our works.

And once again, another disclaimer here. We don't begin work in the first quarter. The first quarter in Brazil is a quarter that is a release period. So it make no sense to begin in the first quarter. They begin starting from April and May. So the revenue catch-up happens in the second quarter with strong concentration in the third and fourth Q. The first quarter, we both begin with the works. But in the pipeline, we still have a revenue growth perspective for the next quarters. If you analyze our future results, they're also growing. It is significantly over what we had in our res basis in the first quarter last year. And in our business, when one grows, -- and your -- since it's a capital-intensive sector, it consumes cash, you demand more working capital here.

So in our recurring operations, we shouldn't have such an expressive cash generation in the next quarters, but we have generated value trying to monetize assets in our balance sheet. We've done this -- we did last year. And then these last quarters has allowed us to grow, generating cash consequently since our leverage level is comfortable. And our long debt has allowed us to grow and return healthy dividends to our shareholders. We intend to continue with the same policy, but it will depend on the market scenario, capital cost, available resources.

So I think it's a little too early to say with regards to perspective, we don't -- so it wouldn't be prudent, cautious, but we do intend to work with the same practice as we adopted in last quarters, but this would depend on a macro scenario that we will see before us. So in a macro, without considering numbers, we should have a cash consumption. And through the monetization of assets, we'll try to offset this, generating cash and returning to the shareholders, but as long as discount rates demanded by the buyers of these assets [indiscernible] to us because the sale of this asset is not a need in terms of capital structure, it is -- well, this is an opportunity to monetize things to allow us to reinvest this cash generator with return rates over the discounts allowed so that we can return this cash to our shareholders maintaining our book as close as possible to the current level with increments of net profits and increments in ROE.

That's how we have tried to work. But to say what we will see before, it's not easy at all, more or less the scenario we say we see here. But it's difficult to give a more consistent perspective as to what we will see. I think it is better to wait for the conclusion of certain operations to make any kind of announcement like this to the market.

[Paulo Henrique De Sousa, executive]

Next question, Marcelo Motta.

[Marcelo Motta, analyst]

Very quick question. If you can tell us how you see the relationship between margin, working capital and sales price of units? Ricardo said that the focus of profitability of the company will be working capital, the high cost here. And would it make sense to speed up the sales of sales? I don't know if it's just price, a product or region. So how do you see how these variables work here to speed up a return to the company? 20% ROE was good, yes, but I'd just like to understand when we look at the outlook, how comfortable are you with these metrics?

[Ricardo Valadares Gontijo, executive]

An important point here, in spite of, yes, we do want to have a BSO, net sales speed increment, this definitely is not happening via price adjustments, any kind of adjustment here in terms of margin. We have seen a demand for the product. We have seen available credit for this. For certain projects, we do consider prices with regards to what we have seen in terms of demand, but no kind of repricing of products that can impact the gross margin.

With regards to sales speed because of our current operations with very healthy margins, I think we would generate more value by speeding up the sales, because if we increase prices, gain margin and reduce sales speed, we will have more leverage with it. You end up losing financial expenses because of the cost that we have to -- so you're kind of making your business more risky because you're working in a more leveraged way. So an increase of sales, speed is healthy, specifically when capital costs are in the certain levels.

We do believe it's healthier. However, we have worked with the idea of having a volume of launches, particularly in the second quarter, higher -- it's higher than the first quarter. And here, when you launch between May and June, you have a lower period of sales within -- in the first quarter. So it's difficult to say. We're doing as best as possible. But if you launch a product in April, you have 3 months to sell within the quarter. If you launch in June, you only have 15 days to sell. So this impacts the sales speed. It's not so easy to think of this, but certainly, it is a priority here. And this is where we believe will be possible to generate more value because the more comfortable scenario that we have in terms of costs in civil construction. We will work in line with this. It's not easy.

Today, we have almost BRL 4 billion of products for sales. This is almost BRL 140 million more in the first quarter -- in the quarter. It's not so easy to raise the sales speed to increase this, but this is where we see greater opportunity for generation of value.

[Paulo Henrique De Sousa, executive]

Next question, Jorel. Jorel, you have the floor.

[Wilfredo Jorel Guilloty, analyst]

Most have been answered, but I have a question about demand. We know that you operate in the Level 3, and I want to know how you see the demand with lower levels? Do you see a difference in demand, kind of income if Level 3 is greater than Level 2? I would like to have an idea where the demand is coming from and if there is a differential here?

[Ricardo Valadares Gontijo, executive]

Jorel, within Minha Casa, Minha Vida, the product falling under the program, very solid product in all levels with healthy demand, but it is natural. When you have low prices, you have greater volume of customers for that product. Everything we can do to reduce price here and sell to lower-income families to certainly increase the base of potential buyers, your addressable market increases. So it's natural here. But still we have -- to have a greater speed of sales here when this happens. But this doesn't mean that it is not attractive to work with higher-income families because there you can operate with margins that are much more superior. But the greater speed of sales are lower prices, products. However, everything all the products are very healthy from the point of view of return of capital that we are allocating in projects and margins. We are very comfortable with the operations within our program.

[Paulo Henrique De Sousa, executive]

We have one more question here, and it seems to be the last, if it's the -- if you have any more questions. [ Tynar ], you will have the floor, [ INDS ].

[Unknown Analyst]

I would like to explore what has been mentioned with regards to margin quarters. You reported high margins with very controlled cost scenarios. However, Ricardo ended up saying that a more stabilized level would be around 34%. I want to know in terms of timing, when can we see this margin converting to these more recurring margin levels, time perspective here?

[Ricardo Valadares Gontijo, executive]

2.5 years to 3 years, we've been operating over this level and we're going to make the greatest effort possible to work with healthier levels. We are always balancing the VSO, the net sales speed and margin. It is difficult to say when to get to 34%. We're going to try to work with the greatest margin level possible.

[Unknown Analyst]

So one can consider higher level from here on or is this recurrent, 34%?

[Ricardo Valadares Gontijo, executive]

I think it's difficult. As we say, a hurdle to continue with the project is around 34%. What happens here after we go to the streets, we can get to -- we can try to go after better results in terms of price increase. So I think it is a premise to try to find the results, and we will continue working this way. And to always dealing with net sales speed versus margin. But I think Paulo answered that. I had my Internet froze, but I think Paulo answered.

[Paulo Henrique De Sousa, executive]

Well, we have no more questions. Thank you very much for your participation. And I will give the floor back to Ricardo for his final comments.

[Ricardo Valadares Gontijo, executive]

Thank you very much. Once again, I hope to have been able to answer any questions that you might have had. We certainly do believe that we delivered very consistent results in this first quarter. In a way, we -- in a recurrent way, we've been able to deliver better results quarter-after-quarter. And for us, it is very gratifying to deliver ROE over 25%. So when we look at the results this first quarter, we can see the capacity of our teams, the assertiveness of our strategies and products. So it is very gratifying.

We have been operating over the capital cost for some time now, generating important value to our shareholders, of course, for our customers, our team and our suppliers and also a return to shareholders who believe in our work and allocating capital here so that we can try to allocate this capital as best as possible. So this consistency in ROE, considering the 20% barrier, when we look at the first results in the first quarter, it is very important for us.

We do believe, for example, if it's possible to continue here, always trying to maximize return on capital that we allocate in our project. And we do believe that when we maintain the practices we've had in the last years, in the last quarter -- the quarters, it is possible for us to remain with consistent results. It is our objective here as a company to show you that we can work in a sector that has always been considered a very volatile sector, generating value during low interest rates, but does not generate value in high interest rate periods. But we're trying to show you that our business be less capital intensive. And here, you can generate value in a recurrent way, specifically in the scenario we'll be going through.

And I think we've been able to show you consistent cash generation, incremental year. We've had the pandemic. We had cost challenges and we've been working. We have been able to transform our business in a less capital-intensive business, and we've been able to show a very volatile sector can certainly deliver very consistent results with low vulnerability even vis-a-vis these most adverse scenarios that we've seen in Brazil and the rest of the world.

So I would like to thank you for your participation, for your questions, and we do hope to continue with this journey. And we are always at your disposal to answer any questions that might have remained. Thank you very much, and have a good morning everybody.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]