Direcional Engenharia SA

BOVESPA:DIRR3

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, everybody. Thank you for participating in our earnings release of the second quarter 2021. With us is [ Andre ] from IR; Ricardo Ribeiro, our CEO; and Henrique Paim, CFO.

Firstly, a very quick disclaimer. This event is exclusive for analysts and investors. It is being recorded. [Operator Instructions]

Also, this event is being transmitted simultaneously in our YouTube channel in our site. Anybody that wants to access it, please feel free to do so. Lastly, I would just like to say, statements contained in this notice regarding business perspectives, operational and financial projection results and references to the company's [ potential ] growth constitute mere estimates, more based on the Board's expectations and estimates regarding. Although the future considerations is not guaranteed performance. And this can lead to results that materially differ from what we expect.

Now I would like to give the floor to Ricardo, and he will make the first part of the presentation. You have the floor.

[Ricardo Valadares Gontijo, executive]

Good Morning, everybody. I would like to thank you once again for your participation here in our results earnings release at the second quarter of 2021. I would like to begin with highlights where, in fact, we are very happy with what we were able to deliver in this period, these last 3 months June this year. We closed this quarter with the greatest gross margin of Direcional ever since we opened up to the stock exchange in 2009. This is reflects of the huge operational efficiency and also a huge pride for all of us to be able to deliver this level of gross margin in a scenario of very expressive cost increases in our sector. Since the end of 2020, I believe we have anticipated when we began to notice this movement. We implemented a policy with relevant adjustments in our operations so to face as best as possible the scenario which materialized in the last month. So we changed our product mix in the company. We altered the characteristics of the Direcional apartment. We implemented a growth pace that was very strong in Riva but this quarter it represented almost 30% of our net sales. Also, we implemented a repricing policy of our stocks. And in my point of view, it was very successful.

We changed the negotiation policy with our policies, our suppliers. And with this, this quarter, we managed to have a very expressive result, and we were able to deal with this cost increase reality in a very satisfactory way in our point of view. So this quarter, we also were able to deliver a level of gross margin without impact in the VSO. And this is very important for our operations.

Now with regards to each one of these charts that you see in this page here, I would like to highlight, we closed the second Q with a record in launches and sales, a growth -- 47% of net profit compared to the first Q this year. Also as growth of revenue, which was very little expressive. So this growth in net profit came from gain in margins and efficiency in all the other lines of our balance sheet. So the revenue should increase from here on, should be over what's been -- and this becomes very clear with regards to the growth we have in the results of future exercises. Paim is going to talk about this. Also we attained this quarter, 14% ROE, return of equity. And this has demonstrated this growth has been very consistent. So not that we are satisfied with this level, but this has shown a path of growth that is consistent with our return of equity which is the metric that we analyze here in the company.

Another relevant highlight here is with the payment of BRL 100 million dividend that we did in the second quarter, Direcional delivered to shareholders between dividends and buyback of shares from October last year to this last payment of dividend, BRL 270 million, representing a yield of 14% in a period of more or less 8 months. So here we have in a vision, we have been able to do work. And I do thank the team that has been fantastic. They have done a most focused work, everybody very determined, this whole team working with the same objective and it has allowed us to deliver very healthy returns to our shareholders.

Now going to the next page just now, moving on to Page 4 and more specifically with regards to launches. In the second quarter this year, we attained BRL 785 million in volumes launched, representing a growth of 36% compared to the first Q '21 and [ 123% ] compared to the same period last year. When we analyze the first quarter this year, first -- rather first semester this year, the growth was 177%. We attained [ BRL 1.3 billion ] from January to June. In the last 12 months, the launch -- the volume launch attained [ BRL 2.7 billion ], a very important growth with regards to what we attained in the last 5 years.

Page 5, considering net sales, we also had a very important growth in this indicator. Our sales attained BRL 614 million in the first quarter, more than [ BRL 1.1 billion ] in the semester. This is 62% when compared to the first half 2020. Last 12 months, net sales were exceeded BRL 2 million -- BRL 2 billion, showing this expressive growth that we have been implementing in the last years.

In the next page, Page 6, and this is the great highlight here. With this growth in launches has been followed by the growth in sales. This allowed us to deliver a VSO that is very resilient. In this first quarter, the consolidated VSO was 18%. Direcional, 17%; Riva, 26%. Both -- in both segments, this was the greatest level we delivered in terms of VSO in the last 5 quarters, showing very clearly the resilient and expressive demand for our product, assertiveness of the lands we acquired, pricing of the products in the market.

Page 7. Now I would like to give specific highlight Riva's operations represented a very expressive growth in terms of launch and sales and an important avenue of growth here in the group with margins and sales did very healthy. In the quarter, we -- in the semester, we attained more than BRL 300 million, representing a growth of 146% when compared to the first half last year. And in the quarter, there were BRL 178 million in net sales, representing growth of 46% quarter after quarter, the second semester when compared to the first one in 2021.

A VSO of 21%, showing our assertiveness here with the development team and with all the efficiency of [indiscernible] in construction, showing that Riva can deliver gross margins over this 38% that we were able to deliver in consolidated way and a gain of productivity in Riva has been very important to allow us to able to lead this scenario, in a scenario with expressive cost increase and very resilient here in gross margins.

Now I'll give the floor to Paim, where he will share with you the next steps, and then I will be at your disposal for Q&A at the end of the presentation.

[Henrique Paim, executive]

Thank you very much, Ricardo. Good morning, everybody. Thank you very much for your participation in our earnings release second Q '21. It is a huge satisfaction to be with you. Firstly, I would like to demonstrate my -- just how grateful I am to our 6,000 collaborators that have been dedicating themselves quarter after quarter. Only with this can we attain such differentiated results with commitment and dedication of our 6,000 collaborators spread out throughout Brazil. So thank you very much, everybody.

And at the point, it's we are very proud to be a winning company such as this one. Our capacity to deliver, our capacity to differentiate ourselves with regards to the market, deliver all the results that we have. And lastly, but not less important, this company has a huge capacity to reinvent itself. We have been through several business cycles here. We have been able to make money and have huge discipline in the strategic execution. We are focused, and this is our differential. And this is portrayed here very explicitly in the numbers we show you with all the problems that all of you know that happened to the sector. And we, with our discipline, have been able to differentiate ourselves.

Here on the next page, to the left of the slide, we have the behavior of our net revenue. In the extreme light, we have the track record quarter after quarter, same period last year. The first quarter, second quarter 2021, we can see that our net revenue remained stable with small growth. This is represented very clearly by business cycle.

Here, we do launches. It's a very -- we continuously sell. We have the construction works, and then we begin to recognize the construction work through completions. And then you see the revenue. You saw in the slides that Ricardo presented to us the growth with regards to launches, sales. And now, most probably in the next quarters, we will deliver a growth that is substantial in terms of revenue that is foreseen parting from the moment that the sale was done and we have the construction works ongoing.

Comparing first quarter 2 '21, this growth will scale in terms of launches and sales. The products have been very assertive. Each launch we do, we have been able to imprint a very great speed of sales, transfer of prices, and we trust that this -- this revenue will occur very expressively in the next quarters.

To the right, we have what will happen in the next quarters. So parting from the moment that I said that the works will continue happening. You have a -- you can speed up these works now at a greater pace and you will begin to see this revenue that is a deferred revenue. It is a backlog. And within our budgets, we can see, even with all the NCC buffers that we included in our budget, we still have a very positive perspective with regards to our gross margin, clearly showing that Direcional is a differential player in terms of operational efficiency. This is a mantra. We go after each cent. And every way we look, we go for operational efficiency. And this is the great competitive differential of the company, definitely a barrier of entrants -- of new entrants in this market. Next slide.

Here, the gross profit -- the net profit. Here to the left, we have the adjusted considering all the BRL 116 million in the second Q 2021 evolution of -- a track record, 19%, showing you in the curve here above we have a gross margin of 38%, which is the highest gross margin that we attained since the IPO, an important evolution from second Q to '20 to '21, showing the vital signs of our business that are increasingly healthier and how, in fact, can deliver differentiated results to the market, our investors and stakeholders.

Here to the chart to the right here, we have the 6-monthly chart, a growth of 30% in nominal value of our gross profit, BRL 240 million to BRL 309 million. And 6 monthly margin is 37% over 34%, an expressive growth even in this very challenging scenario that we have for inputs or products.

And a longer perspective, from 2018, we clearly see the evolution of our margin. We are focused here. We are obsessed with efficiency. We never stop studying technology. We never stop learning. And we are very focused on what's happening. So that we can have technology elements. And then there is management where we always do this management to maintain differentiated gross margins guaranteeing procurement, guaranteeing price with suppliers, maintaining cash continuity, we have this flexibility. So this allows us to do the management, maintaining this huge highlight, which is our gross margin represented by our operational efficiency.

Here, SG&A, we see that we have room, parting from the moment that we began recognizing revenue in a more exponential way in the second quarter, we noticed that we have the reduction, a more -- a greater dilution in terms of G&A and also with sales expenses. So this is something we always have to pay attention to. And it's like nails, they grow, you have to cut your nails. Otherwise, if you don't -- you stop focusing here, it becomes more difficult to do adjustments.

So this is our -- this is a strong focus. We're in a strong process of digitalization of the company. Today, we have almost 60 robots in the financial Board. 10 years ago, we didn't have robots. So this leads to important gains in terms of efficiency and also dilution which will result in -- and we will see this in the next quarters.

Commercial area. Parting from launches, right, you have some upfront expenses with marketing. These expenses were weighed a bit nominally on our commercial expenses, administrative sales expenses, but we have initiatives ongoing that we are developing. So to address decision of to have even more increasingly competitive expenses here.

So Slide #12, we come to the net income, to the left before minority interest. In the last calls, we mentioned that the minority interest had an important relevance for our business development when we were ramping up the growth that we've been doing since 2017, 2018. We noticed that we have been increasingly more selective with the choice of minority interest. They have to add more value to our capacity of originating land, and we have already developed capacity. We are in the different states for -- we've been there for some time. So we don't have a very exponential growth in new areas. We are working on the areas we already work in, right? So we have been very selective so that part of this group, this -- part of this amount that we returned to minority interest, perhaps we can use the profit in the consolidated after this amount. So when you compare semester after semester, we go from BRL 57 million to BRL 89 million gross profit before minority [ 57% ] gross margin going to almost 11%, which is very important. An Important evolution here to more than 2 percentage points. To the right of the chart, we can see our net profit. We attained BRL 41 million, 50% over the first quarter, 30% -- 20% over the second -- the third quarter. And here, we're getting to the first semester of 8% of net margin, 2 percentage points in growth, showing just how all the strategic actions, how this reflects in tactics and how this has worked.

We have talked with you, analysts and stakeholders quarter after quarter. And we want to show you what we've done. We want to show what we have delivered quarter after quarter.

Next slide, please. Here, we would like to show you another indicator in terms of efficiency, EBITDA and how we have the interest rates. They can show us how part of our debt is in IPCA. Part of the rates are increasing, you have an impact in the financial results. This is exponential depreciation, amortization, how our results were here, so we have a very important growth from the second quarter 2020 to '21, 15% to 21%. So we had a huge growth of EBITDA. This is an important variable for creditors. Second quarter -- in the semester, we attained 20%, a very healthy margin, perhaps one of the most important EBITDA in the sections.

To the right, we have always been saying the same thing. We are a conservative company. We've been here for 40 years. We celebrated 40 years in February. We will continue another 40, 80 years, doing -- working on our operations, reinventing ourselves, but the capital structure is our main driver for decision-making. We will not abuse of this. We always say this -- the last quarter, we said that we were under leverage, 7.7% corporate debt over net debt over equity. We advance here in the leverage here between 10%, 20%. We were able to pay the BRL 100 million in dividends, maintaining -- keeping the company with leverage levels that are extremely comfortable.

So our competitors are not in the same level. So we are very comfortable with regards to the management of this capital structure and we always use as a basis for decision making.

Next slide -- next and last slide. Here, we have been doing an intense work since 2018 with ability management of our debt. So here, we attained a level with an average maturity of debt, a breakdown of maturities, everything very adequate and balanced. And if we have BRL 950 million in cash, we can pay an important amount of the debt with this BRL 950 million. So this gives us an enormous comfort. We have a long debt, very well-managed debt, a debt that needs no great [ acrobacy ] here for management of this debt. So we're very, very -- no great juggling here. So to the right here, loans and financing, we have proved that the capital markets receive our name our brand Direcional. We're [ increasingly ] more accepted. CRI is [ 476 ] also [ 400 ] pulverized in the retail debentures. So the pocket that pays our debt is very pulverized. And so we are very comfortable here. We have been a frequent issuer, always very well [ reviewed ] by the fixed income market as also like we are in the equities market. And here, the rest of the breakdown, some bilateral debts that we have. And now we can go to questions and answers. Thank you very much for your participation.

[Operator]

So questions and answers. First question, Pedro [indiscernible], Santander.

[Unknown Analyst]

Congratulations for the result. I have 2 questions. The first with regards to gross margin. A conversion trend in this margin is very high from 33%, 34%. Do you have a timing for this? Second question is cash generation. What do you see in terms of cash generation for the rest of the year? And how does this [ talk ] to a potential impacts in the policy changes of Caixa Economica?

[Ricardo Valadares Gontijo, executive]

Pedro, thank you very much for your question. I'm going to answer the one relative to the gross margin. We have an expectation that, in time, our gross margin will convert gradually to this level between 33%, 34%. Perhaps we can get closer to 34%. In this quarter, we showed very clearly the capacity that we have had of adjusting product mix and also changed some characteristics with Direcional products where we have added value and dealt with the difficulties impact -- expressive impact. So the anticipation we had relative to all these points when we receive a more expressive -- we had a more expressive increase of products -- priced products. And also, I say very exquisitely, a VSO of 20% is very healthy because it always allows those units were not sold to be -- to have a new price, specifically when we part from the premise that our business, once the client is financed by the bank in an associative model, the sale price is fixed.

So the only way of repricing is adjusting those units that are in inventory. So the VSO that we have delivered is very heavy healthy because in these works, we have advanced percentage of 50%, 60%. Most of the products already procured. And with available inventory, we can give a new price to these units and compensate the gross margin of those products that are beginning with the sale of inventories with a great gross margin.

This work was very well done. Today, we are comfortable with the idea that the size strategy has allowed us to deliver differentiated results. We believe our gross margin will converge to this level because this is the margin level we have considered for our launches already with provisions here of the INCC during the execution of the works and products being launched, we should converge to this level. And perhaps too close to 33%, but 34%, the work was very well done. You've seen the work in a backlog margin, 1.2 percentage points in the semester, almost BRL 700 million. So it was a very good work. This convergence should happen but we have been able to deliver margins of the ones we have seen as recurring margins.

And this where -- what we consider in the moment we launch a product. When we launched the INCC expected is already in the price of our product. So all this noise that we've had, all this concern with cost increase, in here, I would like to say that -- in our budget, you have cost increase. Everything we've done has allowed us to deliver results over the ones we believe are recurrent.

We don't -- I can't -- I don't know the size of the cost here. But certainly, we have been able to minimize this and this has become very clear in the results we've delivered. This minimization has occurred in different ways, and we will continue trying to work in this format but consider the gross margin in the next quarters converging because we believe that this is a threshold that will allow us to deliver a return of the capital invested.

Second question. First, thank you very much for your question. With regards to cash generation, we have been doing the off-plan transfer in Riva in a very satisfactory way. This ends up consuming less cash than what we initially considered in the beginning of the project. So in our models, we imagine that we would have enough plan transfer with Riva products, 50% of customers, and we have been able to transfer 70% of our customers. This leads to lower cash demand. And even with this important growth ramp-up of Riva, our need for working capital to pay for this ramp-up has been mitigated because of the off-plan transfer capacity. Also, this off-plan transfer, we -- a year ago, 2 years ago, our off-plan transfer was 100% concentrated in Caixa Economica. Now we have private banks entering this market, wanting to do off-plan transfer with SBPE resources here. So we see a changing bank profile, trying to enter this niche of middle-income customers between BRL 4,000, BRL 5,000. This leads to an element of increase in suppliers for us with regards to this type of product, which is very healthy for cash generation, on cash flow of our business, stressing the fact that our business is asset light.

Also, our contracts register. The Caixa made a change in our construction contracts that finance the construction of the works. The registration of a contract happens in 45 days. We have a lot of efficiency to register these contracts. The impact here in cash generation was marginal. It was -- it didn't get to BRL 20 million. So we do not foresee a continuity of this impact adjustment has been done. We go into normal dynamics now where the contract has to be registered so that, that amount can be disbursed credited in the accounts of the developers and we are very comfortable with regards to the registration deadline. We have been very efficient, here, a change of xml files with customers. And this has made a huge difference so that we have a more expressive cash burn when there is a change, such as this one that occurred in April related to the cash process.

Lastly, but not least -- not less important, we continue looking for opportunities for the care of assets. We are pioneers in the sale of our pro-soluto portfolio in December, showing just how important this strategy was, and we continue being very focused on new possibilities. We've seen -- we look at our portfolio. When we think of to sell, you have to consider all the 10,000 identity numbers of our customers. So this leads to an important operational complexity. There are many stakeholders involved, but we're building this. And once we have this ready, we will have the capacity to continue selling assets, accounts receivable pro-soluto portfolios, having this cash, this will generate cash. This will allow us to maintain leverage where it is so that it doesn't grow much more, eventually continue with a very aggressive dividends policy, the world in a very satisfactory world for the shareholder of the company.

[Operator]

Our next question [indiscernible] Alonzo, Citi.

[Unknown Analyst]

Congratulations for the results. The first question is with the sales of operations. You had an operation of BRL 40 million, all the way to the follow-up with Pedro's questions. Have they gone through -- have they contributed to minimize the cash impact? And where do you see the cash burn, right? Where do you see ideal level for SBPE financing? So in vis-a-vis this scenario of contracts, should you -- will you open the margin of a project for the EBITDA? Or can you come closer to the market?

[Ricardo Valadares Gontijo, executive]

[indiscernible] very quickly, this operation that you mentioned is an operation where we entered as partners. But the operation structure, we were -- it was a partnership. And when we bought the land, so that [indiscernible] could enter, the most practical way was via purchase and sale of quarters. So there is no impact in the results. And the second operation, I think in keeping with what we've been saying in the last quarters, we have tried to optimize our capital invested in lands and assets and the second operation that you mentioned here was an operation of land sale. So we brought an investor to make a swap here. And this operation has helped us with a cash burn in the quarter, cash generation, but no impact in the results.

[indiscernible] with regards to your second question, that has to do with the SBPE, we in Riva have worked with Caixa. And an important point to stress is that [ Caixa ] does a [ great ] analysis of customers in SBPE based on the interest rates. And this is what measures the capacity for financing customers. It is 8.25% in the SBPE segment. Well over interest rates that private banks were practicing before this increase of the ceiling and the long curve of interest.

So until this moment, we have not seen an expressive change with regards to interest rates at Caixa. We believe because of the demand we've seen with Riva products, it will be possible to continue operating with this margin level in the Riva segment, even if there is an adjustment in rates in real estate credit, property credit. So we do not see any kind of margin losses or because of a possible future scenario but did not materialize. And we see room in the areas we've worked in with [ Riva ] but to maintain these margins because we've had a very solid demand. It's too early to say. The eventual change of interest rates, what -- how this eventual change will be, but I think it makes sense to work maintaining these gross margins in the Riva segment, which is a bit of what we are delivering in Direcional, 2.5 percentage points Riva.

[Operator]

Our next question Andre Itau [indiscernible].

[Unknown Analyst]

I have 2 questions. The first one considering the midterm, if we consider a more challenging scenario with regards to interest rates for Riva parallel to this also consider an eventual change in the subsidy curve of Minha Casa Minha Vida, would it be reasonable to imagine a potential migration of the Riva land bank focusing more in Level 3? And do you think this makes sense? Do you see this possibility in order to [ float ] these lands to these segments? The second question has to do with minority interest. They were kind of heavy in this quarter. Should we expect this in the future or any kind of change here?

[Ricardo Valadares Gontijo, executive]

So Andre, with regards to the Riva land, a change in terms of subsidy curve, we do not imagine anything in this sense because subsidies -- launch with subsidies in guarantee has been around BRL 500 million, and it is being compensated by reduction in subsidies. So we don't see a problem here with regards to Minha Casa Minha Vida or [ current ] Verde e Amarela but it is difficult to have an increment of subsidies or anything in this sense.

Eventually, with regards to Riva segment, we could have part of the products benefiting from an eventual change in Casa Verde e Amarela. If the prices here were incremented since Riva begins to work in the segment immediately over Casa Verde e Amarela and goes to BRL 500 million, BRL 600 million, eventual changes could allow one to go to the lower rate of Riva products within the program where we do not see an impact of [ Selic ] and the [indiscernible] in the cost of funding consequently, the real estate credit in the program. Perhaps there could be a migration of the Riva product to Casa Verde e Amarela if we had this price increase, but there's been no announcement in this sense in spite of cost increases that have somehow pressured things to happen this way. There wasn't this change.

If there is -- if it does exist, Riva can have products that can go to Level 3 of Minha Casa Minha Vida which would be more and more important point, a flexibility we can have with regards to Riva products considering the future. But we have to wait for it to see what happens with Casa Verde e Amarela eventual impact and perhaps where we could have flexibility that could result to benefits, specifically with regards to affordability of Riva products and an increase in demand for these products. I don't know if I answered your question well.

[Unknown Analyst]

Paim, can you please answer the second question?

[Henrique Paim, executive]

Yes, it was very clear. Well, if you can just -- with regards to minority interest, we have been having a relationship with minority interest team. We have been performing very well, and the minority interest has obviously made good use of this performance we've had. So they had a more relevant share in the total of our business. But when we look prospectively just how much when we sit and talk with new minorities, our cycle is very long. So everything we begin to do generally has effect in the long term. So we still do not see short-term effects with regards to what we've talked about in the last quarters, a reduction -- the minority interest would reduce the total profit. But we believe that in the next quarters, this should begin to happen, parting from the moment the new negotiations then to have a lower share of minority interest, except from some very specific cases where we will consider this in another way. But minorities as is, they add value for us to be able to enter that market at that specific moment. And here, we tend to have a gradual reduction of this. This will happen very gradually because many things have happened. Minority interest still part of our project, but this is a strategic driver that we consider in the long term to have less and less minority interest, making good use of the net profits of the company.

[Operator]

Next question comes from Elvis of BTG.

[Elvis Credendio, analyst]

Two questions. The first, with regards to competition, could you please tell us how you see competition here with Casa Verde e Amarela, the middle income. Do you see a movement of players leaving Casa Verde e Amarela going to middle income because of a cost scenario. And this study is kind of challenging for low-income products, right? So do you see evolution here?

Second question has to be -- has to do with construction costs. In the conversations that you have today in the third quarter with material supplier, specifically steel, do you see or expect a significant price increase for some materials in the second semester? The two questions.

[Ricardo Valadares Gontijo, executive]

Elvis, with regards to competition, I would say because of the VSO that we have delivered, we have found a very healthy scenario between supply and demand. And where we have been able to maintain very consistent solid VSO specifically Riva this quarter with expressive growth of VSO getting to 26%. I would say that our expressive reduction of the participation of certain companies of Casa Verde e Amarela, the migration of lower levels to higher levels, so 1.5% going to 2%, 2%going to 3%. However, it is not clear to see a reduction, a strong reduction with regards to supply of Casa Verde e Amarela. What we see is that in terms of [ cost ], prices have been offered at slightly higher prices to minimize the margin loss because of those companies that work in the company in the segment. with SBPE where Riva works, we noticed a greater value of supply in Sao Paulo.

In Sao Paulo, we have a lot of very well structured players with capacity to supply these products in the greater scale. However, we have noticed maintenance of demand in this -- in Sao Paulo, right? It's a very resilient state. Sao Paulo is a very different market, the rest of Brazil. I believe, and we have noticed that even with this increase in supply, the demand has absorbed these projects. Away from Sao Paulo, I think the scenario is very simple to what we had in the last years. We don't have so many players operating in this segment.

So this is where I believe Riva will differentiate itself and where we have been able to deliver a different project, an object of desire by most of the population with an income that fits into this profile for the purchase of a Riva product. So we found the level where there is demand, the customers were not -- met their needs for some period. And now we have been able to offer a product that perhaps is unique in this state. So I don't see a lot of imbalance. I think everything is balanced, except for Sao Paulo, where we have seen a greater supply, but a strong demand here, too. Your second question with regards to cost, we do not hear -- from here on, have any kind of discussion relative to the price of steel. We had a last increase around 30 days ago. At this moment, there is nothing being discussed here with regards to price increase. We believe that there isn't much more room for the increase of price of product.

I've been in Direcional since mid 2004. And in these 17 years, I never saw anything so similar, increase -- price increases of products in the sector. So when you analyze the INCC material prices getting to 40% consolidated earnings INCC 17. I think it switched its peak. Once the economy goes back with -- once we have a better more normality here, we will see commodity prices dropping, iron ore dropping very expressively in these last few days. So the scenario we're working with, and we believe from here on, is that there is going to -- the prices will normalize. We see in the last weeks, an improvement here, some products we've already seen price reduction in terms of something regarded -- with regards to commodities. But we need more time to have a clearer view and see whether this price increase has, in fact, stabilized or whether we're going to have a more adverse scenario. But in principle, this is not in our radar. This is not what we see. We believe that these price increases will stagnate a bit. But this is what we believe, what we've experienced, and we know that one thing is different -- one day is different than the other.

[Operator]

Next question [indiscernible], Bank of America.

[Unknown Analyst]

I would like to go back with regards to margin. You had a good margin gain this quarter. And in the report, it is attributed to gains of cost -- economy of costs. So it's important to say what were these cost economies? I know that it is a specific acknowledgment. But can we expect more of this in the next quarter?

And the next question has to do with the backlog margin. Good part, it was attributed to this economy and costs, but it usually happens at the end of the works. So I want to know what led to the gain in backlog margin.

[Ricardo Valadares Gontijo, executive]

So in order to try to clarify any eventual impression that you might have had when you read the report, yes, parting from the moment our construction works is almost 70%, 80% built and economies obtained are definite, then we acknowledge there's savings. And since you very clearly mentioned, parting from the moment, this savings is acknowledged when the work gets to a point that it's almost finished, this goes through DRE and should not impact the backlog. There was an impact here in the backlog, which was very expressive, almost BRL 790 million, so there were several other measures that we adopted here that were fundamental for this increase in margin recognized by our DRE.

With regards to works -- construction works economy, the impact in our margins was close to BRL 3 million. What went through the DRE was not so expressive.

Most of this increment margin increase came from product adjustments that we did that allowed us to offer products with some value items that we added to the Direcional product. This allows us to better increase the price of this product And there was an increase of Riva share in our business, which almost reached 30% now. And Riva works with a gross margin that's slightly over, so Riva bring in benefits to Direcional.

And I would say that probably point of view of adjustments, perhaps the least relevant here has been the economies of the construction works. And we don't believe this will happen in the same amount that we had in the last quarters. I think this margin increase comes from an important change that we did in several areas of the company, some I have already mentioned. And the other is supplies where we, in this scenario, change the negotiation policy with suppliers, anticipating payment, obtaining discounts, product discounts. And this is another item that has allowed us, but this is not the same increase that has been shown by [ NEC ] does not reflect in our construction work prices. So I don't believe that this is a one-off impact because of -- I mean an economy that perhaps is not going to happen in the future.

But as I said, we do expect our gross margin not to remain in the same level. They should go to that margin, 34% margin or slightly over the 33% we had already signalized. And also in this quarter, because of our VSO and what we have tried -- the fact that we have tried to keep it in 18% to 20%. When the works is almost 20% -- it's 80% advanced, and costs are logged, we are able to adjust the sale price of inventory. Part of this goes to DRE and the other to the backlog. And we can deliver a margin increment because of the VSO where -- that we have managed to keep it in this level, limiting our capacity of having to reprice our products in the case of product increase -- price increases.

[Operator]

Now the next question, Jonathan.

[Unknown Analyst]

Ricardo, Henrique, and congratulations for your results. So how are products being absorbed? How you see this affecting in the long term the mix of launches and net sales? Riva, would they get to 50%? How do you see this break up?

[Ricardo Valadares Gontijo, executive]

Jonathan, the third quarter, we believe -- we have had a solid demand for products. We are in the beginning of August, the second month of the second half of the year. It's early to get to a conclusion, but we have seen a continuity of demand with Direcional and Riva product. Riva will have an important role in our operations in this quarter. We should continue having growth of Riva operations, such as we've seen in the prior semesters. Sales, 30% of what we sold, launches in the second quarter, didn't get to this level. But looking forward, it will depend with regards to what we'll have in this long interest rate curve, with regard also bank appetite, with regards to real estate credit, the cost of the credit, but Riva should continue gaining representativeness in our business as a whole.

We see Riva share of being close to 30% consolidated. But if the scenario remains so, we can -- we might get to 50% for Riva. But It's a little early to say because we have a lot of variables in this macro scenario, and it's important to consider this when to continue the growth of Riva. When we have more better interest rates in Brazil, the Riva segment has almost an unlimited funding sources. So Minha Casa Minha Vida segment, we are limited by the FGTS that is used for this program. So it's more difficult to see an expressive growth in the Direcional segment considering Brazil as a whole because funding is limited. In Direcional, we have grown, but it's been -- it's done -- this happened because of market share. With better interest rates, the market can grow as a whole, the market as a whole. So growth occurs becomes easier here. There are many variables. Things have changed a lot in Brazil, and we have to adopt this new aspect. We have to better see where this thing -- how things will happen here that Riva in the next quarters will gain representativeness. It's certainly a path of growth for us.

[Operator]

Next question, Bruno Mendonca, Bradesco.

[Bruno Mendonca, analyst]

So with regards to revenue growth from here on because the results of this quarter was fantastic. And even with regards to revenue, was slightly below what I expected. Not that it was bad, but my feel is perhaps if perhaps the construction works was slower because of the pandemic. But what can we expect in terms of acceleration of the -- in terms of acceleration of construction works in the second semester and a growth of revenue, acceleration of growth of revenue.

[Ricardo Valadares Gontijo, executive]

Well, the second quarter, the fact that there was such an expressive growth came was a result of the completion percentage of units delivered, right? We had expressive sales, not as much as in the mid- to high standard segment. But when you have launches, generally, it is over the speed of sales, that is the recurring speed of sales of this product. We had an expressive sales volume with more recent volumes and we have a lower POC. Generally, we begin works of works when the rainy period ends. So parting from the second quarter, when the rain stopped in Manaus, you saw what happened last year. This was a region where we had a longer rainy period. But all the works and launches began parting from the second quarter. And the second -- and that we believe that in the third quarter, this will result in a growth of revenue because we have selling BRL 600 million in revenue. So we have an important catch up here with regard to the advance of the works. This is already happening. This is not a concern for us. It's within our analysis and this growth expectation of revenue is what we have here in Direcional and our works are ongoing. And the beginning of the works is a period where earth -- the earthmoving work, everything that is done, [ the advance here is slow ].

So when the works begin, the structure phase, this is where we have growth that is incremented. So we believe we do have an increase in revenue for Riva, and it's going to be very important for leverage -- operational leverage gains, which is something we expect to happen in a very relevant way. With [ management ] of good administrative expenses, we should have a reduction of G&A and dilution of sales expenses. So we presented in the material, sales expenses relative to revenue remains very stable when we consider this second quarter to the first. So you see an important reduction here, too. And we expect that this will happen once the recognition of revenue accelerate. We are going to have an acceleration of revenue in the second semester with the sales catch-up. This is the scenario we've worked in. So what was your second point?

[Bruno Mendonca, analyst]

That's all.

[Ricardo Valadares Gontijo, executive]

I don't know if you have any other questions. I hope to have answered this to you.

[Operator]

Perfect. So our next question, [ Guillerme Nunez ] from [ Condor ].

[Unknown Analyst]

I would like -- I have 2 questions. First one, with the increasing results, Do you see the possibility of a new IPO Riva -- a new Riva IPO attempt because you've canceled. And with the trend, the tendency of [ Selic ] price increase, rate increase getting to 7.5%, do you believe that this would have an important impact in the next periods?

[Ricardo Valadares Gontijo, executive]

With regards to Riva IPO, which we did not continue with in mid-last year -- a year ago now. We always analyze the opportunity to generate value to Direcional shareholders and to Riva business itself, right, which is already separate from our Direcional business. This strategy has been very successful. However, it is difficult. We have to consider market conversions, other companies that work in the segment. So we always monitor, track ways of extracting value to company shareholders, not necessarily via IPO. There can be other formats. What I think is important to make clear here is that we're continuing with the ramp-up process of Riva. We have been successful in the monetization of assets in the company, that has allowed us to finance an increase in working capital demanded by the fast growth of Riva operations with the assets we have in Direcional without needing to leverage the company. So this keeps us [ stumped ]. We continue working in this assets monetization process, which has been a differential to generate value to our shareholders.

I was doing an analysis. If you consider the last 3 years of Direcional, from July, August 2018 to now, Direcional delivered between price variation of stocks and dividends paid to our shareholders, a 144% return.

This comes from us being able to make good use of opportunities that we have -- that have emerged. We are -- we continue with Riva operations. Riva generates huge value for us. We always consider opportunities that might emerge so that we can use them in the right moment. So then we don't have anything in the radar. But certainly, we will make a communication to the market, a material fact. But it is not something that we are working with at this moment.

So we continue with normal operations. And the great -- the bigger Riva becomes clearer, it will be for operational analysts and investors that it generates value.

With regards to the trend, the tendency of [ Selic ] increases, this is a concern always for us. We want to know the reflects of the long interest rate curve that might impact the pricing of the real estate financing by banks. They have already considered -- they've already transferred part of this increase of the interest rates to funding credit, but there is a player which is Caixa Economica Federal, public capital, it's a -- and it is proud of being a leader in this market, making many operations, having a huge penetration in this business. So what happens is the rate of Caixa Economica Federal for Riva product is TR plus [ 8 25 ]. An important number of our customers is financed by Caixa Economica Federal. So there is a point of attention that we have to continue. In media, Caixa has said it will not touch the interest rates when there is -- with regards to savings account. It's -- they're abundant in terms of savings accounts.

So we see that there is a movement from private banks, but there is a public bank, a government bank that offers credit to our customers, has an important share in our portfolio in terms of long-term real estate finance here. And if the continuity of this trend confirms itself and the long interest rate gets to 2 digits higher, the impact will be unavoidable. But it doesn't seem to be -- we don't believe we're going to have 7% to 7.5% [ Selic ] increase in the next years. The prospective incremation -- inflation next year is not that. So I don't see a huge problem. If the scenario continues as it is today in Brazil, we cannot have volatility, there is uncertainties. We have elections in 2022. So let us wait. We can't make guesses. But at the current scenario, we feel comfortable with the rate where we can have affordability, customer income to -- and also finance them to buy products, our products.

[Operator]

[Operator Instructions] So we don't have any more questions. I will give the floor back to Ricardo for his final consideration. Thank you very much for the call.

[Ricardo Valadares Gontijo, executive]

So I would like to thank for your participation once again. In fact, we are very satisfied with the results we were able to deliver this quarter. The whole -- everybody in the company committed and involved. This is the pride that we have. Everybody working together with the same focus to be able to deliver the results showing the differential we have with regards to our business in Direcional and Riva.

We know of the challenges that the country is going through and is imposing upon us because of the pandemic, the increase in price -- of prices. We're trying to deal with this reality the best way possible. And we have been able to go through this scenario, adjust operations to this reality that oftentimes cannot be changed. And we continue being very optimistic with our business, considering the future, the continuity of this ROE increase, delivery of value to our shareholders as we've been able to do this in the last years, always focusing on our customer, which is our priority, which is the long term that we have to look for our survival and to continue eternally. We have -- we want a satisfied customer where we can transform his life for the better.

Thank you very much, everybody. Our IR team are at your disposal, and we will continue talking always at your disposal. Thank you very much. And have a very good day. Thank you.

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