Direcional Engenharia SA

BOVESPA:DIRR3

Earnings Call Transcript 2021-Q3

[Paulo Henrique De Sousa, executive]

Good morning. Thank you for waiting. Welcome to the Direcional's Earnings Release for the discussion of the results of the Third Quarter. I am Paulo Sousa. I am investors -- I work with Investors relations in Direcional. And with me is Ricardo Ribeiro, our CEO; Henrique Paim, CFO and [ Andre ]. This event is exclusive to analysts and investors. It is being recorded. All the participants will be in listen-only mode during the presentation. At the end, we are going to open to the Q&A. And as always, in the Zoom, you click your raise your hands features, and we will manage the queue of questions. This event is also being simultaneity transmitted via YouTube. You can access our IR site via our link there.

And lastly, before we continue, it is important to remember that the statements contained in this conference relative to business perspectives, operational and financial projection results are beliefs and premises of the administration as well as the information currently available. Future considerations are not guarantee of performance, and investors should understand that the general economic conditions of the industry and other operational factors can affect Direcional's performance and lead to different results than those expressed here.

Now, I would like to give the floor to Ricardo, who will begin the presentation. You have the floor, Ricardo.

[Ricardo Valadares Gontijo, executive]

Good morning, everybody. It is a huge pleasure to be with you once again in order to share with you our results with regards to the third Q 2021. This was one more quarter where we show the consistence of our operations, we have been here in the company are very satisfied with the results delivered at a moment where we had several challenges imposed upon us. We were able to navigate in a very solid, very resilient way. And thus, we are certainly very satisfied with the results we delivered. Within this scenario that is not so simple, not so obvious, such as our economy, our country, the world has gone through in this period, specifically with COVID and post-COVID cases.

I would like to begin with Page 3 of our presentation. The main highlights of our operations. So I'll show you some highlights here in our page, but it's also very important to stress some aspects of our operations, attitudes, changes that we implemented in the company's management that has led to very clear results now in our income statement. The first highlight, which I think is fundamental to show you, we have been questioned and one of the main topics that has been in the market at the moment, if the cost increase that happened specifically in the last months. And from -- and more recently, we haven't seen this as much as before, but it certainly did affect our economy and our sector in a very substantial way.

But I would like to say that we are maintaining a very solid gross margin in line with what we had in the past with what we have transmitted to you in our earnings release calls. And in this scenario, even with this very resilient gross margin, it is fundamental to tell everybody the relevance that -- that gain in operational -- operating leverage we've had in our company. The dilution of a series of expenses because of the increase of our revenue has allowed us to deliver growing net margins. As an example here, net revenue of Direcional grew 21% when we compare the third Q '21 to the third Q '20. Gross profit grew 65%. Net revenue grew 7% relative to last quarter, 16% it grew -- and the net profit grew 16%. So when we look at all the lines of the company's balance sheet, not only gross margin, it's very relevant at the moment because it's an important part of this cost increase has been offset here in Direcional by the operating leverage that we've had, and we believe we'll continue from hereon. And this is very clear with regards to our deferred revenues.

We ended the third quarter with more than BRL800 million in revenue, and this will be acknowledged once our works continue with deferred revenues on REF margin of 39%, backlog margin. So here, we closed the third quarter with the greatest launch of -- with the greatest record of launches and also the greatest volume of sales, the greatest ROE in the last 8 years. The greatest gross profit in the last 7 years. A very solid gross margin, 33%. Backlog margin, 39%. When we talk about gross margin and backlog margin, it is important to stress the work that has been done here, which is the balance between VSO and margin. We've always said that we would aim here at Direcional to have VSOs of 18% -- 18%, 20%. We've operated in the Riva with 21%, Direcional slightly below the average VSO in this third quarter was 17%. But this has allowed us to operate with extremely adequate pricing of our products, which has led us to go through these last 12 months without any change in the gross margin of the company.

As I've always said, the way we operate, anticipating the repricing movement of our product, anticipating the purchase of input, we've changed the mix of Direcional's products, and you will see the relevance that Riva gained in the last quarter. No doubt, this makes the whole difference, so that we could deliver gross margins, which are a benchmark in the market with strong, solid VSO and low-volume of inventory. In our point of view, this strategy was very important and has proved to be very assertive in this period where the challenges that have been imposed upon us has not been small. But we, in fact, have been able to deliver very solid results for our shareholders.

Another highlight that I would like to say, and I believe will be very important from hereon is the geographical dispersion of Direcional. We don't have a concentration over 15% in many of the cities we work in. And this, in our point of view, will be very relevant for the next quarters and specifically for the maintenance of a very solid operation here in our company, Direcional and Riva.

And now after having gone through these highlights, which I believe are very relevant. I would like to show you the material beginning with Page 4, where we address our launches. As I said before, the third quarter, we had a record volume of launches in the history of Direcional, when we consider the real estate development segment and also not considering Level 1, which had a very expressive volume in Direcional. BRL1.1 billion in the third quarter, a growth of 88% relative to the same period last year. In the 9 months closed now in September, we had growth in launches of 129% compared to last year, BRL2.4 billion.

Now to the right here, we have our track record. And when we analyzed the launches in the last 12 months, we exceeded BRL3 billion, 78% growth when we compare to 2020. Apart relative to launches, we have to stress the relevance that Riva has gained here. Riva in this last quarter launched BRL621 million over Direcional in launches. In the last 9 months, closed in September '21, Riva launched 20x more than 9 months closed September 2020, the same period last year. This operation has allowed us to adjust the company's mix allying growth to margin -- the maintenance of margin. And Riva today has a very relevant role in the strategy of the group as a whole. And once again, all the design of the company has proved once again to be very assertive product with extremely solid demand by the market and efficiency in the production and the building of the Riva projects. Coming from the know-how that Direcional acquired in the last years, where we were leaders in the launch of new construction methods in the Brazilian construction market.

Now going to Page 4, relative to our net sales. In this last quarter, we had BRL643 million in net sales, 40% growth relative to the last -- the quarter of '20. And in the nine first month, we exceeded BRL1.8 billion, we grew 53% relative to the same period last year. When we analyze the last 12 months, more than BRL2.3 billion in net sales. Once again, I would like to stress here, the growth of Riva, it's representativeness, too. And I'm going to address this matter more specifically in two slides where we will zoom into Riva's operations. The following page, Page #6.

In spite of a huge volume of launches in this third quarter more that our VSO remained solid 17%. Once again, demonstrating the strong demand for our product. And this demand, if we continue to notice, even after the closing of the third Q this year, in October, we had very strong sales levels with significant growth compared to last -- October last year. And also, October was the best first month of a quarter here in Direcional for 2021. We always like to analyze the quarter, the first, second to the third, always comparing the math. We believe that this is very relevant in these analysis. And October was the best first month of a quarter and this year of '21. So we still see strong resilience for the demand of our products Direcional and Riva.

The VSO of the company, as you can analyze, has remained stable in these last quarters. We haven't had variations of VSO, and we've tried to adapt VSO, pricing of products, margin maintenance, and I believe that this adjustment is fine-tuning has been very adequate. And once again, it's proving clearly -- it's clearly proving itself in what we are delivering. Another important point to stress here is the fact that we, in our vision, we anticipated the repricing movement of our products, probably from the end of last year, when we noticed that we would have a scenario of cost increases, high cost increases, and this has allowed us to go through this period with very small variations in the gross margin.

Page 7, it is fundamental to stress to highlight Riva's operations. The growth is very strong, 37% of the consolidated volume of sales for the growth. Riva's strategy is very assertive. The demand has proved to be solid. Even with this scenario where there was an increase in interest rates, we believe that the products are differentiated and has been object of desire of our customers in the population of the cities we work in. Riva had a growth in sales in this quarter of 281% when compared to the third Q last year. And in the first 9 months, the growth was 192% compared to the first 9 months '20. We also grew quarter-after-quarter, third Q [ base ] compared to the second Q of 33%, and even with a launch over BRL600 million, VSO remained very solid, 21%.

And now I would like to give the floor to Paim. And so he can show you the main financial highlights, and I will be available for questions and answers at the end of the presentation. Thank you very much.

[Henrique Paim, executive]

Thank you, Ricardo. Good morning, everybody. Thank you for your participation in our earnings release relative to the third Q '21. Before I begin show you the financial highlights, I would like to highlight two points with you. The first one, we have been mapping all the social impacts that our business has vis-a-vis society. We are amazed with the social impact. We see this in the regions we work in. And when we begin to talk about ESG matters. We noticed that the S in our operations is very highlighted, and we're very proud to work in this scenario, changing the realities of low-income families, mid to low-income families in the Brazilian market. These are 12,000, 13,000 families that can change the reality every year when we mobilize this real estate and the family can change the perspective of growing, breed -- raising their kids, leading to very low-income places without drinking water, they can move to other types of buildings with playgrounds and all the rest. And we show you the importance of operations to have a better Brazil in the future.

Secondly, increasingly, we've been using technology as a competence here in Direcional. We're changing this in a very fast way. It's almost like a technological revolution. It's a digital revolution. We now reached in this quarter, 80 RPAs, vis-a-vis repetitive task robots, and they have replicated themselves. We have learned to reprogram, program these robots in-house. And all the repetitive movements have been done through these robots, this meant doubling the size of the company in 2021 without any change in the amount of headcount that we have in our back office areas. So this shows how the company has been becoming more and more automated, digitalized. And this is in our DNA. We will focus on this concept, because we believe this is the present and future path for this. We want to improve operational efficiency. We had to have technology as an ally. And also as a cultural point for our business here for operations.

So next slide, please. So here already with the financial highlights. First point I would like to say to you is the net revenue. In the left to the slide, we can see that we went from BRL376 million in the third Q '20 to BRL453 million, 21% growth, 9 months '20 compared to '21, 20% growth. So this growth is considerable, but it seems to be low when you compare it with launches and sales. But this is very simple to explain our business cycle. We have -- first, we have -- we do prospect of plan and then we do launches. And then we do launches, sales, we begin the construction works, and then we begin to measure the construction work. And then we have percentage of completion and we begin to receive revenue for the operations. The first cycle of launches is very successful. The assertiveness of products is translated into a VSO at a very solid level. And now we continue with the cycles. The works are going at a faster pace, and revenues will come here very strongly.

All the revenue to the right side, which is not in our balance sheet, which is the deferred revenues revenue, it is accumulating. So we're going to begin measuring this. And once this deferred revenues begin to come -- it will become, and it will become net revenue and we see gross margin over our deferred revenues, which is very, very healthy. This means the continuity of our trend for growth margins well over what we've seen in the market, which is the result of very active business management, which will solve all the problems. And the construction method, specialization in this construction method, that very few companies can deliver, for example, can build a square meter for less than $400. So if we were anywhere in the world, we would be very competitive because our construction capacity at low prices is certainly a differential.

Page 10, please. So here, we have the adjusted gross profit. Here, we can see in the upper line to the left, we see the behavior of our gross margin, a long time, adjusted gross margin, we had here a peak of 38% in the second Q. This quarter, we are 36%. We say to the market that are -- we end up proving always gross margins of 34%. So it isn't a surprise to have to have gross margins closer to 34% than 36%. This means we might suffer a little more with gross margin because of the impacts that happened, but we begin to see the steel industry now having normalities in lead times, and we can have a possibility of having just-in-time with steel. In the worst time of the crisis, the worst-case scenario took 90 days to deliver. And now we see differences here, because it's important to have working capital allocated in steel rather than interrupt the construction site. So we anticipated procurement, but now we see things going back to normal. And this inventory will be reduced in time and very soon we'll convert this into money, into cash. And in the nine first months of 2021, we see an important growth, 26% of adjusted gross project -- profit BRL472 million. And in the 9 months accumulated here, almost 37%.

To the right, we see the evolution we had, how it was. It was very resilient. So if you see BRL342 million adjusted gross profit in 2018. Here, we have an increase of almost more than 70% in the third Q '21, the last 12 months, almost reaching BRL630 million. So the vital signs, when you see the graph, except for the ones related to leverage and debt, all of them demonstrate that we are a vibrant company. We are growing. We are breaking results. We continue with disciplined focus on our business with very consolidated business models, a lot of discipline here, and this has reflected in all the data that we have demonstrated to you. We've been demonstrating to you. And the journey continues to be very positive. We're very excited by 2022 in spite of the risks we see. We have to be very careful with interest rates, inflation and the political scenario. These are [ aspects ] that might have some impact on our margins for 2022 because of affordability or income company of our customers, but we are very focused here, and we are very excited with 2022 because everything in-house, everything we need is ready in-house. We have opportunities for great gains in market shares, because many smaller-sized companies are not being able to survive such a difficult crisis such as this one. So now we have a very balanced capital structure, very conservative, and perhaps this will allow us to be in this blue scenario. And here, we will be able to go deeper into Casa Verde e Amarela and SBPE.

Next slide 11. Here, we would like to show you two points that we really do focus on track, which is SG&A. The G&A to the left here. So here, in the third quarter, we reached 7% of the gross margin within the slide here, but we have operating leverage, the capacity of escalating the operations and ratifying this cost. So we believe that this G&A certainly over the gross margin. And I believe that the next cycle will be revenue because launches are definite and revenues will have -- will occur. We're going to have dilution here and we are -- and technology certainly will help us also in order for us to be the best operator here, reflecting all our need for operational efficiency and really so that we can be a benchmark in terms of operational efficiency. We're working with technology, and this dilution effect will come. And sales expenses, we have marketing expenses that go together with launches. So here, we end up having a great upfront in marketing and then the sales expenses happen. But when you see just how we accelerated sales, when you compare sales expenses over net sales, we see this dilution effect here. And here, these two numbers you see here, sales continue growing. We're going to have greater dilution effect and gross revenues will attain excellent -- levels of excellency here and one of the best in the market. We are sure we are certain that we will attain this.

Here, I would like to share with you the issue, we have operations that we do not consolidate the revenue in our balance sheet. We have partners in this business, but this is a work that Direcional has been doing. In general, it has been -- to administering doing back office executing the works, all the operational work is in the hands of Direcional, but this does not appear in our revenue. And we wanted to give you a disclosure here, disclaimers to show you just how important this SPEs that are not consolidated but are important for us. We show you how this has been growing. So in the 9 months in '21, was 29% growth, and this is directly reflected to our equity pickup. You can see we grew 108% when comparing the third quarter 2021. And in the 9 months, we grew 336% comparing 9 months '21 to 9 months '20. So we've had success in this kind of operation. And since it doesn't appear in the revenue, we want to show you that we have this, but this appears only in our equity pickup in the balance sheet.

And the last -- second to last slide, net income before minority interest. Here, we have our revenue, if we -- we had 100% of our operations with us. So before minority interest, the net margin is 13%. Of the third quarter, for example, was 10%. So 12.6%, we pay to minority interest, and we tend to reduce this percentage of minority interest. We've been talking about this for some time. This rollout is not fast, but we will continue with the same trend, reducing the participation of the share of minority interest. So they don't have this net profit, and this net profit should tends to be then the net profit of Direcional 100%, it takes some time. But this is a strategy that certainly will bring much value to our shareholders. And in the last 9 months of 2021, 100% Direcional we've grown compared to the 9 months in '20, we grew 59% of our gross profit, demonstrating a growth of company. You know, sometimes small-sized companies and start-ups, all cases, high basis, right? And we've been growing with these multiples, very multiple, very aggressive multiples in a very conservative way without risking the operations, without being a borderline in terms of credit risks, we are conservative.

And in the last slide, I will show you this. This is the second to last slide, right? This is the second to the last slide. We have the capital structure of Direcional. All our -- every decision we have parts from the premise that we will remain conservative in time. We have been in Brazil for 40 years. We want to remain another 40, 80 years, even more in Brazil, and we will only do this if we remain very balanced in our capital structure. Brazil is very cyclical, right? So we have elections next year. We still have this leverage that would give us comfort between 15% and 20%. Now we're almost at the top of this range. Although it's 20%, it's still it's a lot of leverage. We have 50%. So we're less than half of what would allow us for our debt. But we want to continue having this buffer, safety buffer because we believe it's very healthy for our strategic reactions, use cash, buy stock, to be able to buy some land that emerges in operation from a competitor. So this is -- this whole thing is very important for us. We've been doing this.

And to the left, the EBITDA, this is an indicator that we don't look too much in the corporate world or rather the development world, but we want to show you the behavior of EBITDA. Just to stray you how our operational efficiency goes well. We reached 22.2% in the quarter, which was the best EBITDA margin in 40 years of Direcional. This is a reflex of the work of this whole team that has been arduously working, so that we can demonstrate these such positive vital signs for our business.

And now the last slide, I would like to share with you the debt, 87% of the total debt is long term, only 13% is short term. We have cash today to pay 4 years, a little more than 4 years of our indebtedness. So we're very comfortable here relative to liability management. We concluded initial for BRL100 million on the 21st of October disbursement occurred the same day, that Paulo get you the last 4 Secretariats. The stock exchange dropped 4% that day. We did market time, and we had no problems. And we have another BRL100 million in cash, which is -- and capital market is very open for us. The debt basically is paid by debentures, CRI and every issue we do with greater demand, greater price compression, greater speed of sales, and we have had this recurring. So this has given us a lot of comfort to be able to operate in the future and use opportunities that certainly will appear in 2022, and we'll have everything ready to make good use of these opportunities.

And now we are here to answer any questions you might have.

[Paulo Henrique De Sousa, executive]

Thank you very much for waiting. Now we will begin here with questions and answers. We have the raise your hand feature, and we have a queue now. And the first question comes from Thais Alonso, Citibank. Thais, you can pose your question.

[Thais Alonso;Citibank;AVP Research Analyst, analyst]

Good morning, Henrique, Ricardo, Paulo. Congratulations for the results. The first question has to do with margin. You've been able to maintain margin. And what we should see -- what should we see from here on price gains? Do you still have productivity to gain with works? And the second question has to do that Casa has said at the end of the year, it will remain with the rates for the program. But next year is uncertain. So what do you expect in terms of the impact here for your works, your construction works?

[Ricardo Valadares Gontijo, executive]

Good morning, Thais. Thank you for your question. Relative to margins, you might have noticed that we have a very solid defer -- backlog margin. We've always said, just as Paim said in his presentation, we have a gross margin of 34% for launches. We've operated above this level for some time. In the second quarter earnings release, we said that 38% reported shouldn't be recurring. In the next quarters, it will be possible to see this gross margin converging to this hurdle we have when we've improved the launch of a product. Although we're working to operate with a more solid gross margin, always considering that analysis, VSO versus pricing, any important adjustment in the mix of our product where Riva has an important role.

We haven't seen today in our ongoing projects -- projects in progress, no problem in review of budget. We're very comfortable with our budget here. We have greater visibility, more comfort when we consider the potential increase in costs. We live -- we experienced last year, many things changing in very short time. But in the last months, we feel more comfortable with regards to the maintenance of cost maintenance in a more benign scenario from the point of view of price increase of products. So we see a growth, a very solid gross margin. And specifically with information for the supplies and everything, we have a very diluted exposure and specifically a small exposure in the market of Sao Paulo. And we believe that everything is okay. We see no great surprises relative to gross margin. Unless, of course, we have a change in the mix of the projects being delivered, of which costs have been incurred in periods where products were cheaper. And now these products are reprised. Since we work with VSOs, very solid VSOs, at the level of 20%, we always have products relative available for sales with 50% PoC. So we repriced this inventory.

We work with larger gross margins. New projects launched go into the gross margin here. And once the new projects begin to have greater representativeness in our revenue, we have a convergence of this gross margin. But nothing so recurrent, nothing that will cause us any kind of discomfort relative to the gross margin of the company or eventual volatilities, greater volatilities of gross margin acknowledge in a certain quarter. This is not our scenario. We've done a very good work to a pricing mix and engineering in the execution of works and supplies. So this was a work, and we're very satisfied and no greater problem here.

With regards to 2022 SBPE, it's difficult to say because interest rates don't go through our management. It's natural when we see the curves going around 12 select perspective of growth of increase, we've seen this in the last -- the Copom meetings, and this might reflect in the pricing of real estate credit given by private banks and Casa. Relative to Casa, which is the main partner of Riva and Direcional operations, I've always said it works with relationship rate, and then you have another rate that is used for the analysis of the -- but the buyers capacity of buying, and this will have no impact here. Any impact in the Riva product affordability comes from an increment and of this rate. And so we have to see where this adjustment comes from, right? And also we see impact. However, the point here that it's difficult to measure at this moment. And it's clear when interest rates grow, the addressable market of potential customers drops because the necessary income to buy the product groups, we have to see the size of the supply for this product and the fact that we are operating in less obvious market, this ends up being very positive in Riva's operations.

So at this moment, we have a strong comfort for the operations. We have projects in our pipeline next year, maintain. We've seen a very strong VSO in the Riva market, and we will adapt the volume of Riva launches to what we will see in terms of demand. Our objective does not have inventory, but not work with very high, no very low VSO. 20% is healthy. We've seen a strong demand credit, and this hasn't interfered in the speed of sales of Riva products that have had new pricing for the new reality of the sector. And the impact has been small in terms of demand. So this is a positive. And we have worked without any adjustment in the Riva operations for '22. We'll update you on eventual changes. But the supply of this product in the areas we work in is restrictive and eventual increase in interest rate will lead customers that are buying products for BRL500,000, BRL600,000, as they will become Riva customers. I don't think that the Riva market tends to suffer so much with increase in interest rates. So if the specific increases, we are very optimistic with Riva operations. Would I'd like to add to this?

[Thais Alonso;Citibank;AVP Research Analyst, analyst]

No. Thank you very much. I'm satisfied.

[Paulo Henrique De Sousa, executive]

Next question Bruno Mendonca, Bradesco BBI. You have the floor.

[Bruno Mendonca, analyst]

Hello. Thank you for your -- for this earnings release. Ricardo, you told this a few times about the geographic diversification as a leverage. Can you tell us a little bit more about this sales and price transfer per geography? Specifically, I want to hear about the performance in Sao Paulo versus other states. Sao Paulo has always had this greater competitiveness, more market, yet you had this trade off. So what is the role of Sao Paulo in this more difficult market? If it continues difficult and what areas have been highlighted here? This is my first question.

Now if I could ask the second question. In an eventual scenario of an increase in Casa's rates, what do you see as alternative here? Do you see room to increase the pro soluto accelerate securitization to maintain attractiveness here? Or perhaps revert part of the projects back to the program? So tell us a little bit about this land bank if the scenario goes to a worst-case scenario.

[Ricardo Valadares Gontijo, executive]

Bruno, thank you very much for your question. Beginning with geographic diversification. Our market, it is very difficult to generalize a scenario for a country this size of Brazil. We can say that the market is good or bad because it behaves in very different ways in the different cities we work in. And it's curious, but sometimes in the same city, we have regions that are very solid, and others now. So this is a very local characteristics of our market. So any generalization here can mean a very strong analysis era mistake. When we talk of Brazil, we talk about a very pulverized diluted work in more than 42%. So we have a strong contract here. We've been very careful here. As you mentioned, we've been looking at behavior of the Sao Paulo market, which is very resilient with a formal income that is extremely high. It's a very formalized market. This is fundamental in the approval -- in the obtention of credit by banks. However, there is a strong number of players and also you have the developing -- the developers.

You have many real estate funds that have very strong roles that end up having the capacity of elevating the volume of supply in a very significant way. So this is an area where we've seen the balance, the demand and supply, we've been very focused on this. And also the behavior of the labor right, because of the greater number of worksites that we have in the pipeline. We've noticed in the last months, behavior where returns of our invested capital in projects away of Sao Paulo have been superior to the return on invested capital in Sao Paulo. Also, we've noticed VSOs that are higher in areas where we have a smaller number of supplies, a smaller number of players.

Also in a scenario, we were talking about the -- when we were talking about the potential IPO of Riva, one of the items raised by investors was the Rio Janeiro market where Riva has an important operations. This is the market that Riva represents the greatest VSO. And Direcional has very solid VSOs too. So this has been proved in practice, and we are very optimistic with our capacity of working in this market and the launch potential we have here in this area, where the behavior of the demand has been greater than in more obvious areas like Sao Paulo.

When we talk about potential -- alternative potentials, specifically in the Riva segment, seeing that Direcional does not seem to be a reality. Recently, we had the reduction of interest rates in the Level 3 of Casa Verde e Amarela. No doubt with the reduction of interest rates and the increment of the capital program to BRL264,000, we have potential and flexibility to make adjustments in Riva lands. Make adjustments so that they are falling to the program. However, the calculation is simpler. We have land where we can have greater and smaller units. If we choose smaller units, we will build more units. So this adjustment in the product mix to adapt the Riva mix between Group 3 versus SPT segment is feasible. At this moment, it is not what we have done, we've noticed a strong demand, a little bit of Minha Casa, Minha Vida. And these clients that were out of the market between 2015 and 2019 when the SPT interest rates were very high. They have been our main buyers at the moment. But in case we need to adjust products so that in the Riva mix, we have a more relevant part of projects in group 3 with greater volumes of units to rooms and a bathroom. This is perfectly feasible. And I don't see in the Riva scenario because of this flexibility and the change of products, the risk of having equity invested in lands where we cannot monetize.

So at this moment, I think the important message to convey here, we're very careful here in Direcional with the return over the equity of the company. And this is one of the main metrics that we analyze here. And when we invest in capital in a certain project, we need to be flexible in a more adverse scenario to return the capital of the shareholders, giving returns over -- that exceeds the capital of the company. And this is something we're very careful about because capital paralyzed in lands will not sexist because we might have flexibility here. If necessary, we will be flexible here, if necessary. But this is not a scenario we see. So this -- all of this is under our control. It is a priority we have. This is something we've seen in the last quarters for Direcional. We have delivered huge capital dividends to the shareholders. So this is a priority here. So if necessary, to return the capital, we will. This is not the scenario we're working in because this scenario is being allocated. We're very satisfactory returns. You've seen our ROE growing quarter-after-quarter. So these are possibilities that we have to generate value to our shareholders.

Another point that you mentioned relative to pro salute. At the moment, we haven't changed anything in our pro soluto policies in the last years. We have -- we don't have this as a possibility at this moment even because we don't have problems in terms of evaluation of real estate by financing banks or crediting creditor banks, it's in line with sales. So we haven't needed to increase pro soluto to have lower income clients. We have a concern with credit, our pro soluto portfolio has a default rate that is very significant. I don't know how -- it is a benchmark in the sector, right, the quality of our portfolio. In November last year, we were the first company that made a true sale of part of this portfolio, and we are always analyzing these possibilities. Our portfolio is around BRL300 million, a true sale of this portfolio depending on the discount rate is a huge generator of value for our shareholders. And we're always analyzing these possibilities to use these opportunities when they emerge. So these alternatives, we always consider innovative operations that bring value to our shareholders. In case we see these opportunities, certainly, we will do this, maximize return to our shareholders. We've always used the opportunities here. Monetization of these assets is one of the opportunities we always analyze.

[Bruno Mendonca, analyst]

Just because you said something that drew my attention here. Although the increase in the cap of Minha Casa, Minha Vida is recent. Don't you think it makes sense to discuss this again with cost increases the way they are. We've seen smaller players in the group to suffering with margins. The government discourse saying that the program needs the Level 3 cap or roof to be able to pay for the subsidies of the lower levels. Isn't it time? Do you see room for this discussion to come back in the short-term in a faster period because it's a recent.

[Ricardo Valadares Gontijo, executive]

Yeah. Bruno, I think it's important to have in mind that the resources FGTS, in spite of the fact that it has a high -- very large financial solidity, it is limited. And these resources available for Casa Verde e Amarela is not enough to meet the demand of families that have income of less than BRL7,000, which is the limit to fall under this program. So I think that at this moment, even considering the best solution for the country, not necessarily for companies, given that the budget of the program has been executed, it is preferable not to have an income price of this cap price because this would mean the construction of a less -- a smaller number of units because of this. Rather than -- so I think it's not very probable to have any increase of cap prices because this 10% increase has been less than we have of INCC margin of 17%, until now, November, where the new cap prices came into force.

So this shows the efficiency of companies and also because companies below that have been operating below the inflation. So I think it's not very probable to have this price increase. But the challenge we have today, when we talk of the segment, those families seem to in the program is that the income of families have not gone up in the same proportion that work -- construction works have grown. So I believe that an increment in sales prices has been, for example, has -- the expenses of the acquisition of real estate is being used by paying for gas, everything else that has price increases that grew a lot. So we're going through a scenario of deterioration of capacity. And so this is a situation we're going through, and we wouldn't like to do this because it's difficult to change in reality. And in my point of view, the focus for Level 2, those families that are losing capacity of buying real state shouldn't occur because of the increase of the price, but because of gain in affordability that could come through increase in subsidy and also adjustments of those income ranges that have access to lower interest rates within the Verde e Amarela program.

These are triggers that allow the interest rate to change. If you adjust this range, you allow families that had greater interest rates, the ones that make BRL3,000. These families where interest rates have an increase, it go up to 300 -- 400, you would give a gain in capacity for families to this. So I think solutions here like this would be more intelligent here. This is my point of view. Whether this is going to be possible or not, it is difficult to say. We have to see how this is going to go in the program. Many people are migrating to higher income ranges. We have to see the behavior and the decision of the ministry, which is responsible for these policies. In my point of view, a change here would be more relevant for the program than increase in price.

[Bruno Mendonca, analyst]

It's a long discussion here. Thank you, very much.

[Paulo Henrique De Sousa, executive]

Our next question, Gustavo Cambauva, BTG. Cambauva, you have the floor.

[Gustavo Cambauva, analyst]

I would like to ask you a question, a comment that Paim made with regards to capital structure in the presentation. I'd like to understand, you have been in a very large growth pace. And even cash generation is not so strong as it was in the previous years. And once you have -- once you're getting to what you want in terms of leverage, 20% seems to be the roof. I would like to understand how you see this growth from here on and the ways of financing this growth, the idea is to reduce the launches or payment of dividends or sell more receivables portfolio. The question, since this cash generation is weaker and you continue growing, how do you adjust this in the capital structure? Thank you very much.

[Henrique Paim, executive]

So, first, I mentioned with you, the capital structure for us is a priority, number one. And specifically, when we have capital structure, that's when we do anything, that's where we grow, we pay dividends, and we do anything. Here, we have two points that are very relevant. The first one, we had to have an inventory, right. The steel industry delivered 6 days. And in the worst moment of the crisis when prices weights increasing exponentially, the steel industry would spend 90 days to deliver products. Apart from the moment is 90-day lead time began to happen. We began to feel insecure to know whether we would have products to continue with our constructions. The word we didn't want to have parallelization of the works, if I had to stop the works because I don't have steel because without steel, I don't do anything, right? I have to stop the work. And the loss here is very damaging. So we opted to spending more here. If we hadn't done the sprint of steel procurement, specifically steel, there were other materials too, right? But we wouldn't be burning the cash. So we have the effect where we accelerated procurement. We have steel inventory much beyond what is necessary. But this cash burn allocated in inventory will end up performing, and the money will come back in the next quarters, thus mitigating the cash burn.

And so another thing we've worked on, our assets. We don't have love assets here. As Ricardo said, if we have an opportunity, and if we have demand, real estate fund to buy a new pro soluto portfolio, we will analyze this. The first operation last year was very successful. We had contact with the funds, the funds bought it. And at the end, we doubled the value. So it is important in our pro soluto portfolio. We've always said, when we look at our portfolio, pro soluto portfolio, we say, “oh this is a necessary evil.†But if I can monetize this, strengthening cash generation. It's a true sale. I'm selling assets to a third-party. If I'm successful here in this recurrence, then we can allow leverage. We can go back to leverage closer to 15. And depending on the size of operations, if the price makes sense, we can continue with our growth in Riva. Our operations per se, it's not -- once again, strategic drivers, buying of land by a swap without dispersing cash. And everybody is happy here with resolution classes. So this is not working capital.

So if you want to be free of the contract, you can. We have off-plan transfer, 100% to Direcional, 70% Riva. We're transferring very well. Riva that was a paradigm, they would say, this low-income customer will have difficult. No, everything is doing very well, off-plan transfers. Everything is great. The Casa has benefits, is not so adjusted by the INCC, and we've been doing this for gross margin not to slip. And the third thing is industrialized vertical construction, concrete walls, aluminum, fast construction cycles. We launched with a lot of launches, selling fast, industrialized works with shorter cycles. All of this in the basket our operation traditionally generates cash. So all of this together, our capacity to monetize assets that for us aren't so well are not yielding so well in our balance. But when we consider this, we tend to continue not very leverage and continue our growth trend without too much change in our dividend payment structure. We will continue paying good dividend. However, if we continue maintaining our capacity to monetize assets, everything will continue as has been. We will go down a bit with leverage or if there is enough money, we will -- if there is money, we will continue with stronger dividend payments as we have been doing.

[Paulo Henrique De Sousa, executive]

Next question, Alex Ferraz, Itau. Alex, you have the floor.

[Alex Ferraz, analyst]

I have a question, and I think that this issue of Casa Verde e Amarela Level 3 has been debated. There was an increase in sealing prices, but also we had other changes relative to regionalization with greater subsidies mainly in the northern regions where the company has a strong footprint. But the average -- it's not very much the average price you like to work with. But with this revision of greater subsidies, the company could go back and consider these lower income groups of Casa Verde e Amarela or does not fall into the land bank, the margin you're considering, you're looking to work with.

[Ricardo Valadares Gontijo, executive]

Alex, just to add to the Paim's last comment and Cambauva, when we get the volume of materials we have purchased today, comparing October to December was BRL84 million growth in this number. So this meant cash consumption, very well invested, reflecting in the gross margins we're delivering today. It is natural that with the normalization of cycles of supply of these products, we will go back working with lower inventories. And this purchase volume that we anticipated means future cash generation. We have the product, we will build, and we will receive payment for the construction work. So this was a shift in time. We shortened the payment term of some of our suppliers, before we used to have longer terms, we reduced the payment term to have a discount. This discount anticipation remained BRL23 million between the terms we had before and the terms we paid for in the pandemic to have better negotiations. This is more than BRL100 million. The result is clear in the margins we're delivering.

And this shift in time, this will go back when things begin to normalize, we have drastically changed the way we work in the company. In several areas, supplies is one of them. And it is natural that this greater number of capital will transform into cash once the works are done. Alex, revision of subsidies in certain segments we work in and change of interest rate, we have North, Northwest with 20%, 25% less interest rate for certain income segments. And here, talking of our point of view, we are optimistic with all the income ranges in Casa Verde e Amarela. Although we have adjusted the mix of our product because of growth of Riva and also greater exposure of Direcional to the Group 3 of Casa Verde e Amarela. We haven't reduced the launches in the group two. But the growth occurred in other groups, we had a smaller exposure. We saw place to occupy. We continue working with Group 2, Level 2. We're implementing several adjustments in our product to continue being very competitive with level Group 2, and it is not part of our strategy to abandon this group. No matter how challenging this is in this segment because of the limitation of the affordability of these families that did not benefit here. I think the Group 2 was the one that did not have any [ date ]. Group 1 had adjustments, but 2, certainly, there was no change. I would say that this is more -- it's suffering more in the program, but we see here -- we see we can work here because of the reduction of supply we have in this segment. It is still very attractive. It makes no sense that we abandoned Group 2. It will continue having strong representativeness in the company. We see this an opportunity from here on.

[Paulo Henrique De Sousa, executive]

Next question, Fanny, Santander.

[Fanny Oreng Avino, analyst]

Congratulations for the results. We talk about interest rate increases, SBPE. What I want to understand the Riva customer can also access the FGTS. And in moments where we see interest rates going to 12%, here, for the quarter [ holder ] is 8%. So I want to understand the percentage of this customer that use the FGTS as a financing source. And if this funding line can be a mitigating factor to compensate this increase. And I think this will happen because of the increase of the SBPE interest rate? That's my question.

[Ricardo Valadares Gontijo, executive]

The quarter holder is [ 8.66% ], the nominal interest rate. Today, representative here -- representativeness here within Riva customers that have very low banking budgets because the OTC is inferior here. So it is natural for those customers that fall into this demand to get this credit, do not opt for this option because they have better rates with the SBPE. But if there is an increment over these levels, the Pro-Cotista can be an option, can have a certain representativeness. The Pro-Cotista's budget is not so expressive, but also, I believe that there are very few real estates that fall into this Pro-Cotista line. I think the Riva certainly falls into this program. And if the customer certainly can fit fall into these demands that they can be accepted, they can enter here. At the moment, it's close to zero, but it can be a way out in case there is an increase here. We'll have to see what Casa is going to do. It's difficult to say if the increase is going to be OTC rates or relationship rates, we have to wait to see. But Pro-Cotista is a good solution.

[Fanny Oreng Avino, analyst]

Just one more question. The profile of Riva customer, do you see a change here of this customer, potentially higher income than you saw before because of this loss of purchasing power?

[Ricardo Valadares Gontijo, executive]

We have, in average, seeing the income of our customer increase in average. In my point of view, not because his income is compromised with all the debts, but the average price of sales increased, specifically because of the change in our mix. But when we consider the same product, I would say that the income has increased only in those cases where sales prices increased. For the same sales price, I haven't noticed customers with great larger income buying to try to translate this into numbers. This would be realized if we noticed the present buyers below 30%. Those customers that have high income, part of this income is committed to other obligations. So he only has 20% of income committed to the payment of installments.

We noticed that customers continue buying, entering with a greater income commitment lifted by the bank. So we don't see an income raise here and greater commitment of the income. The client opts to buy a place that is better at a higher floor with -- and he commits his income. This is not -- still not a scenario where we can say that is a greater commitment of income. Customers buying these [Technical Difficulty] products, then a customer with lower income would buy before. Have I answered your question?

[Fanny Oreng Avino, analyst]

No, it was very clear. I just wanted to understand here, because this can be an opportunity for you.

[Ricardo Valadares Gontijo, executive]

Up to the moment we have Casa Verde e Amarela and the SBPE segment, the main player with which we operate in Riva is Casa. There wasn't a change in OTC rate nor the interest rates of Casa Verde e Amarela. So the change of income of the customer has been [Technical Difficulty] because there is a change in mix and not loss of affordability because of an increase in interest rates, which would demand greater income by our buyer. This might happen in the pipeline, but this is not what we see now.

[Henrique Paim, executive]

Fanny, just to add to this, something we've noticed too, which I think is a change in behavior of the Riva products that do not have a social interest involved, right? So we are selling with the payment of the apartment all the way to delivery. So the customer has money in his pocket. He wants to invest in an apartment, and he will divide this in 10, 15, 18 installments, together with the permission to take -- to occupy the apartment. And this he fully pays the apartment before delivery of keys in our portfolio. And this is a portfolio that does very well, and everybody -- the customer wants to be always -- he wants to be interested in always keeping up with this installment.

[Fanny Oreng Avino, analyst]

What is the percentage of customers that are doing this?

[Ricardo Valadares Gontijo, executive]

We can raise this with details. Today, we believe 20% of Riva customers. Here, we're not talking about products that have age, i.e., so some kind of social interest. These are SBPE products that we can sell to any kind of public. It was close to zero in the recent past. And now it's almost 20%.

[Fanny Oreng Avino, analyst]

Very interesting.

[Ricardo Valadares Gontijo, executive]

Here, Fanny, we're talking a lot today is a very important information, nothing we have noticed. Because of the expectation of continuity of increase in SELIC with consequent increase of SBPE interest rate with notice anticipation of purchase decision by customers because we have Riva interest in our products, we always offer the possibility of off bank transfer. This is a process. We contract production financing with banks. So clients can already sort of fixed interest rates during the purchase. And this is an advantage we offer our clients. This is the certainty that he can have record credit and a possibility of paralyzing interest rates here. So this is a very interest point that we've offered our customer. And this is why I believe we see strong resiliency here in our demand.

So as I said, October, a strong demand, a very solid demand a month where we have had -- we've had a low income. This was the first -- very first month of a quarter that we had this year. So November is always also performing very well. So these differential seems to be unique aspects that we offer our customers. Very few customers offer this. A very few companies offer this. If you have an increase in interest rates, the possibility of not paying the real estate is that. So when he has the certainty that he can -- he will be able to do this because interest rates will be fixed. This has been a huge, a huge -- something very good that we've done.

[Paulo Henrique De Sousa, executive]

Next question by [indiscernible] you have the floor.

[Unknown Analyst]

[indiscernible] in a more relevant -- with more relevant volumes.

[Ricardo Valadares Gontijo, executive]

This is a question that is -- this is in the works we see every day in the areas we work in, and also the volume of units, the contracting of units. This is public data, and we see the share of the companies that disclose this data. So here, we've had market share gains. And I believe during the pandemic, where the sale was a challenge. And I believe that more structured company ended up doing better, offering the possibility of online sales, for example, a sales team here. So the pandemic had a great -- a smaller impact with these companies. And because of cost increases of product, I believe what I said before, we allocated a significant amount of capital to mitigate the impact of cost increases of products of sales that had already been done.

So we had possibility and flexibilities that help us to better deal with this adverse scenario, first pandemic and also the challenge of the supply chain. So I -- my point of view, the sector is becoming more professional. I don't think it's a larger or smaller company. These are companies that work with conservative with more solid capital structure, anticipating movements and future situation, the most assertive way that goes better through this period. So I believe that this gain in market share was natural. My expectation, number, I believe that this will remain. So people that are working in a more professional way, have differentiated themselves and buyers end up opting because they buy on the plant. So you have -- they work in this more uncertain scenario. For years with notice, again, a market share and the group here. And this, I think, is a trend and should continue. And I believe that this is something that shall remain in the pipeline.

[Paulo Henrique De Sousa, executive]

Next question, Marcelo Motta, J.P. Morgan. Marcel, you have the floor.

[Marcelo Motta, analyst]

Two questions. First, with regards to -- you mentioned in the release, the second and third quarter, you're selling a lot of units close to the launch, very little PoC. This ends up impacting for knowledge of revenue. Do you see this growing in the fourth quarter? Or do you believe it's that the first half of next year? With regards to October, you said was very good. It was the very best first month in the third -- the fourth quarter, right? So I don't know, year-after-year, do you have another metric so that we can understand just how important October is?

[Henrique Paim, executive]

Well, with regards to revenue here, a Ricardo showed you the SPEs that we do not consolidate in our balance because of governance reflect and how this is reflected in our accounting. These SPEs, you've seen that they've grown very expressively. So when we only look at the growth of our growth revenue, this doesn't reflect the whole growth of our operation. And when we add this issue of the SPEs that come via this equity pickup, so we see that the growth of our operation is superior to what is noticed when one only analyzes the gross revenue. We should continue perceiving growth of the level because of the volume of the backlog margin of the deferred revenues, we are selling more than what we are receiving the works began, 6 months after beginning of sales, we have a delay between sale and revenue quarter-after-quarter, we should have this growth in revenue.

And when we analyze the month of October, I've noticed now in the beginning of November, a demand for Direcional products, which are close to the conclusion of the works. So this has been very clear, October and November. So I believe that because the PoC of the sales are more elevated, this can -- there can be a reflex in our level, where sales have occurred close to the conclusion. This is an effect that we saw in the beginning of pandemic. Clients bought closer to the conclusion of the works. We've seen this very clearly in one of the areas we work in, in October, November.

So what I can say here, it is complicated to say this to generalize eventual comparisons between quarters, right. And in spite of the fourth quarter, seasonally being stronger, December is a short month. It only goes to the 20th. So we need to become the month very strongly because the last 10 days are very slow in terms of demand. But still, I don't want to generalize this. October could be the -- how it's going to be as the fourth quarter. But we had 20% superior or October was 20% greater than third quarter. I can't -- I don't -- we shouldn't generalize this because this fourth quarter is shorter than the third one. So one thing doesn't have anything to the other. So I think it's natural for us to have a first stronger month. We work for this. And I don't want to try to imagine how the fourth quarter is going to be because it's always very challenging for us.

And an additional point here, Motta. November is a Black Friday month, and we have several important campaigns in the pipeline and in the loop and our expectation in January, the last year, November has been a very strong month. And we believe and we expect we will continue with a very important month, right, in the 12 months here of our operations with regards to sales, a lot of things are happening, a lot of marketing campaigns, special campaigns for Black Friday that are already occurring. And this is good for the whole month. And so November seems to be that it will be very, very strong.

[Paulo Henrique De Sousa, executive]

So our last question, we received the question by [indiscernible] asking if there is any forecast of additional payment for 2021, Ricardo?

[Ricardo Valadares Gontijo, executive]

So these are decisions that are made by our Board, where several factors are analyzed in terms of leverage of the company, the perspective of FUSE and an application of this cash in new project investment. So we don't know what the option of the Board is going to be in the pipeline because of the scenario we're going through. So I cannot give you any kind of forecast with regards to payment of proceeds or how we're going to deal with this cash generation. So we don't have this information at the moment.

[Paulo Henrique De Sousa, executive]

So we have come to the end of our call. I would like to thank you for your participation and inform you that this transmission, this video conference is available in our site in the YouTube. And now I would like to go back to Ricardo for our final considerations.

[Ricardo Valadares Gontijo, executive]

Thank you very much for your participation. It is always very wealthy to have this discussion on our Q&A. Our team is always available in case there are any questions in the next few days. We are here very optimistic with our operations and the results we have been able to deliver. There are in line in keeping with everything we've applied said and implemented in our operations. It is very gratifying to see the results, the reflex of all the effort the company has done in the company. This certainly is very compensating for us. I'd like to thank the whole team, the Riva and Direcional team for their work, the discipline, the results they've delivered. So one more quarter where we're very happy to show you these numbers. We're working here strongly to maintain this journey and generate the greatest value possible to our shareholders. Thank you very much, and have a very good day, everybody.