Direcional Engenharia SA

BOVESPA:DIRR3

Earnings Call Transcript 2022-Q4

[Paulo Henrique De Sousa, executive]

[Interpreted] Good morning, everybody. It is a pleasure to have you here in our earnings release event, fourth Q 2022 and the whole year. For those of you that don't know me, my name is Paulo, I am IR at Direcional. Together with me is Ricardo Ribeiro, our CEO; and Henrique Paim, CFO. Just to remind you, this event is exclusive for analysts and investors, it is being recorded. [Operator Instructions] Lastly, this event is being transmitted via YouTube and in IR side. Anybody that wants to see it through the YouTube, please feel free to do so.

Now let's begin and give the floor to Ricardo.

[Ricardo Valadares Gontijo, executive]

[Interpreted] Good morning, everybody. So it's a huge pleasure to be with you this morning where we're going to show you and talk about our results in the fourth Q last year and also the year of 2022, the consolidated year. So let's begin with Page 3, where we have our main highlights of the year. And I think that when we look at the sequence of launches, net sales and [indiscernible], there are some very important messages to be transmitted to you. Last year, we developed -- we delivered a total amount of launches, considering our minority interest, BRL 3.6 billion. This meant a 16% growth relative to 2021. And when we look at the last 5 years, this represented annual growth of 27%. When we look at the middle chart, our net sales, last year, we reached BRL 3 billion in net sales, growth of 23% compared to 21% annual growth identical to all launches, 27%. And here, to the right, when we look at our net revenue, we delivered in '22 BRL 2.160 billion in revenue, a 22% growth compared to 2021 and annual growth of the last 5 years, 24%.

So I think the most important message to be transmitted here in this slide. We have BRL 3.6 billion launch volume; revenue volume, BRL 2.160 billion. So launches that are over 50% of revenue. Since we have a gap of launches, sales and revenue, generally, the revenue goes together with launches, but the gap is 18 to 24 months because of the PoC percentage. So it's natural when we analyze this data, we have a revenue goal, a contracted revenue growth that is very expressive with regards to the next 24 months. And we should continue delivering margins gains because of the operational leverage, which is a little bit of what happened in the last years, which, in our view, explains the amount that we have the value that we generated to our shareholders.

With regards to this expected growth for the next years, I would say that the focus here in Direcional is the execution. We had a very relevant growth of launches and sales. Sales are around BRL 600 million below the launches, but the value that we have to generate for our shareholders is the continuity of this execution, a great -- with the greatest level of excellence possible. So delivering growth in revenue, maintaining margin levels that we have been able to deliver is simply something that is good. Growth at this moment because of the level we reached in terms of launches growth is not -- it's not the main value generation, but it shows the level of efficiency we have been able to deliver in the last years in the company.

Page 4 now to address the efficiency and resiliency of our operations. It is clear here where we address our gross margins, we have been able to deliver even in extremely challenging period with few challenges relative to cost cuts of fraud or raw material, very consistent gross margins. And here, we have a very resilient relevant data. In the fourth Q last year, we had an inflection of this -- we've had tipping point of this gross margin when we compare to the gross margin that we delivered in the third Q '22. So this tipping point is a sign in the market that our product costs are very well controlled. I would say several of these products, we have had a price reduction in the last years and also in the year of 2023. And also, we have been able to pricify our products in a very adequate manner.

With regard to the fourth Q, I would say that we had a relevant increment of the gross margin in the last 3 months. And this growth was due to the product mix sold. So I would say that when we analyze Direcional's operations today and the macro scenario where we are in, we have capital costs that are very high, currently in the country. And on the other side, we have a controlled inflation, very solid margins. So our priority during 2023 will be growth of net sales, speed, focus on capital generation. So one of the priorities that is going to be the greatest relevance will be a net sales over the ones we have been working in the last year where capital costs were lower and inflation was higher. So this scenario has been inverted, and we're trying to adapt everything to this new reality.

And also with regards to this speed of sales, I would say that in the last quarter last year, the fourth Q, we had a reduction of net sales compared to the third Q '22. This impacted our recognition of revenue in the fourth Q. But in our view, this lower sales impact in the fourth Q compared to the third had a relevant effect because of the elections and also the World Cup at the end of the quarter. So when we consider the first quarter, January and February, we know we see a very relevant growth in the demand of our product.

We noticed the growth in speed of sales, huge volume of visits in our sales pools and those sales that didn't happen in the fourth Q perhaps has happened in this first Q. And from what I remember, we will have sales in the first quarter that will be superior to the sales of the fourth Q of the previous year. And obviously, lower sales impact the recognition here of the revenue. But the third scenario, we believe that it will come back to normal.

Going back -- going to Page 5. I would like to highlight what we have to try to do in the company in the last years. Many times in these earnings release calls, we deanalyze a specific year or a quarter. But here, I want to show you what we have been doing in the company in the last years -- the last 6 years. So here, I would say that 2017 to '22, you can see relevant dilution of our general and administrative expenses. It went from 13.5% in 2017 and reached -- going down to 6.7% in '22. So we're very close to what we should to our recurring level. And in here to the right, we also address sales expenses that went from 11% in 2017 and down to 9.2% in '22. So no doubt this recurring gain of the operational leverage and a strict control of SG&A has allowed us to deliver increasing net margins even in a scenario where our gross margins remained constant.

So in Page #6, trying to show you the effect of this control and the relevance that we have had in our recurring results because of this increase of operational leverage, you will notice here, the lower line, you will notice a relevant growth in our net margin before minority interest. We consolidated the revenue of this minority interest. And here, when we look at our efficiency levels, we also have to consider in this analysis, net profit before minority interest. So you see a net margin going from 10.4% in the first quarter '21, 2 years later, we are delivering a net margin of 12.6% fourth Q last year.

So when you consider this gain more than 2 percentage points, so this is very relevant. This impacted our net profit. When we now analyze only Direcional's [indiscernible] in our net profit in the last 2 years, we can see that the net profit went from BRL 130 million in the last 12 years closed in '21, getting to BRL 206 million in the last 12 months, closed fourth quarter '22. This growth means practically 60% of growth in the net profit. So this is an effect because of the growth of revenue and gross net margin. From here on, the greatest impact on our lines that are below the net profit should be the minority interest. So we have been growing our share in projects launched and also grown our share in sales that took place. And now you see through the statement of count, you will see an increasingly lower representativity representing us for us being able to continue delivering this growth in net margins.

So as a consequence of this revenue growth aligned to net margin, in the upper line, you can see the growth of ROE that we have been able to deliver in our vision. This has been the main lever of value generation in the last 2 years. This has occurred because of growth in margin and also increase of our working capital. And we've had a very low conservative leverage that in terms of net debt, over the equity below 3%. And this ROE has happened because of the 2 more healthy, solid leverages that we had. Our debt growing in a relevant way in the country. And we have not been used this to I would say that this has -- puts us in a very differentiated position in terms of capital structure to use the opportunities that have emerged in the country, more specifically within my Minha Casa, Minha Vida program.

Page 7. It is important to stress that we have been able to deliver this relevant growth. Because of the growth of revenue here, this should demand more working capital. But even with growth in revenue, we have had returned capital to our shareholders in a recurring way via payment of dividends and also buyback of shares. In '22, when we analyze dividends, not considering the buyback of shares, it was BRL 6 million in buyback. But last year, we paid BRL 174 million in dividends. It was the greatest level of dividends in the last 2 years since 2014.

You can see here to the right, but when we consider the price of our share the market cap of the company at the end of '21. This represented a yield of more or less 10%, which is very -- dividend yield that is very expressive vis-a-vis the scenario of growth in the company and very solid and low leverage. So here, I try to cover what we have done in the last years, how this has reflected our results. And one of the basic premises that we have tried to implement here in the company, which is the continuity of return of capital to our shareholders, trying to align our business, which is capital intensive in nature will transform itself into a business -- services business, which demands less capital. This has been our policy, our way of working. So have great -- the greatest amount of units. So this is what we're going to go after, which are in -- with our projects that are under construction. And we do believe we will continue generating value to our shareholder.

Now I would like to give the floor to Paim, who will go through the main financial points of our results. And I will be here at your disposal during our Q&A session after Paim's presentation.

[Henrique Paim, executive]

[Interpreted] Thank you, Ricardo. Good morning, everybody. Thank you for your participation in our earnings release relative to the 4Q 2022. So before we go into the presentation, I would like to stress the consistency with which Direcional Group been delivering in the last 2 years. Here, we -- the walk the talk. We have been talking with you. We have been disclosing all the numbers of the operations and have been delivering exactly what we have shown our strategic directions. And this has reflected -- been reflected very clear based on the results we've had. So also focused on the very well-done work without distractions through the engineering, operational efficiency. This is the differential of the company. There is an [indiscernible] with engineering in our DNA. We're very close to the business, and we really are very proud to show you in '22, in a year that was so challenging to the sector, such solid and consistent numbers. So please next slide.

Now we will look at this slide. So financial aspects here. I would like to show you the evolution of our net revenue. When we compare '21, '22, 22% growth, reaching BRL 2.163 billion. So our cycle is large sale and revenue and this has happened '23. We will see this revenue growth happening because works continue to be advancing very quickly. Our birth process with concrete walls and aluminum [indiscernible].

So we believe we are going to have substantial growth in our revenue because of what has been done and the advance of the works. This revenue will happen and the operational leverage is -- will be even more stressed in our results with an increasingly greater dilution of fixed costs in the operations. Here, a longer retrospective to the right from 2017, a company that has been able to overcome many of the challenges during this year, going from BRL 752 million in net revenue to BRL 2.160 billion an average annual growth of 24%. So this is -- it's a pure high like it generates cash, pay dividends. So really, we have -- we are very proud to work and deliver these results to our stakeholders and shareholders in general.

Next slide, please. To the left here, we can see our EBITDA margin. There was a slight tipping point going to 21% in the fourth Q, getting to BRL 111 million in EBITDA. When we add this to capitalize interest at BRL 40 million. In 2022, we closed with EBITDA margins close to our historical series around 20%-21% in terms of EBITDA margin. This added to a nominal value of BRL 129 million and net debt lower than BRL 200 million. So an operational number that was very strong, deleveraged company, company that is far from financial problems with a lot of redundancy in capital structure, allowing us to continue with 2023 in the next years, allowing us to know that we are in the right path to deliver the best return to our shareholders. Here, net profit, BRL 209 million, a growth of 31% compared to '21, always showing the growth of the numbers an improvement in revenue, SG&A under control, growing less than the revenue and a bottom line that can be highlighted and adjusted margin -- net margin of almost 10%.

Next slide, please. This is the one I most like to present to you. This is clearly to show you how this group is conservative. And the managers, the administers, we have a long-term vision. We're not here for the short term. We're not here to deliver a nice quarter to you. We're here for sustainability in the next 42 years. The company celebrated its birthday last year, 42 years. So we'll be here for the next 42, 44 years. And the first thing we have to look is capital structure.

Brazil is a very volatile country with difficulties -- macroeconomic difficulties. But when we look at the micro economy, we are very well installed. We are very well placed in the low income sector because of Direcional, Minha Casa, Minha Vida right, and the mid- to low income in Riva, very successful operations, mitigating risks, and we will continue in this market because we don't have any kind of competitor here in the markets we're working in, competitors are having more difficulty in participating in this market.

And to close here, our net debt over equity -- adjusted net debt of equity below 13%, one of the best debt is the debt cash position of BRL 1.200 billion. So our cash can pay 4 years of indebtedness. 35% of the indebtedness over 48 months. So really, the liability management is something that gives us a lot of comfort. First, be able to go to market, focusing engineering new business and now to be able to serve a very favorable way with the expectation that we have of the Minha Casa, Minha Vida program that is stronger now because of the government, the new government.

And here to the right, we have this pie, and we have a capital market paying for 91% of our debt. We have been increasing our SFH share here. This is the SFH with low interest rates. So most probably, we will refer part of this BRL 300 million that will mature in the next months with the resources of the famous [indiscernible] which is for finessing the production. And when there is an opportunity window, we will be doing what we have been doing in the last years, continuing to extend the profile of the -- stretch the profile of the debt, being able to deal with this day after this.

So I would like to close my presentation and now go to press questions and answers. Thank you very much, everybody.

[Paulo Henrique De Sousa, executive]

[Interpreted] Thank you, Paim. So now here, we have our first question, Bruno Mendonca, Bradesco.

[Bruno Mendonca, analyst]

[Interpreted] 2 here. Ricardo, looking forward in the pipeline, beginning with Level 1, you talk -- you said in the last call that you didn't believe that Direcional now would go back to this segment. But from here, we had the local government that had directed many people here. There was a structure that seemed to be very satisfactory. Do you believe that it is possible for Level 1 have some kind of similar structure that can be interesting for you. If anybody -- anything has changed from here on? First question. Second, with regards to Riva. Here, we have seen credit environment, which has been worsening, cash continues resisting, but we don't know up to when. Can you tell us a little bit about how you've seen the sales perspectives and launch strategies from Riva from here on?

[Ricardo Valadares Gontijo, executive]

[Interpreted] Bruno, so first, with regards to the Level 1. No doubt, the local government in Sao Paulo has been able to shield the main uncertainties that exist in the program of this type, specifically where payments are done with resources from the budget of the municipality [indiscernible] and the union, which is Level 1 [indiscernible], these main risks by construction companies and developers one sees a strong demand for share companies interested in here, right, as long as there is from a financial point of view, a margin that will justify the risk of the business. And here, with this program, this was very balanced.

The margins are okay, enough to operate within the program, and it was a very well done shielding of the payment -- risks and payment schedule from the public branch, right? And in the past, this was one of the big causes of paralyzed works, companies that had more serious works from the financial point of view. So when we talk about the new Level 1 potential, if there is a security with regards to payment, there will be no delay in payments because in the margins of this kind of project, there is no room to operate with third-party capital or debt. So we have working capital for 1 month. So we produced a month, we had to receive the next month. We have no room for delay of payments, specifically with capital costs with this level.

We don't have room to delay payments here because of the compressed margins we worked with. If this is shielded, protected, I believe we can do a Level 1 project. We would try to limit any kind of exposure that eventually we might have in Level 1, a certain percentage of our business as a whole. This percentage should be lower than what we had in 2013, '14 and '15. So even with this greater security in terms of payment schedule, we will have exposure below we had before. But it's important to wait for announcements in terms of price, and this payment is going to occur, right? How is it going to be done? So that we can see our appetite in order to try to operate in this program. Level 1, no doubt, once you have work -- control of costs in terms of works, right, the construction works and it's strong.

So it's very interesting from a point from a return of capital allocated point of view, right, because it's very little capital in the short term, but you have compressed margins and you don't have room for mistakes. I would say it's interesting for the continuity increasing the working capital of our assets. But in case we do participate here, we will be very cautious trying to mitigate realities that we have experienced in the past and certainly can be mitigated, I believe, and this happens, our exposure should be lower and perhaps something we would do here, for sure, Riva.

It is interesting to share with you my view with regards to mid-to segment, mid-income segment. At the end of the last year, I made it very clear. I am certain that this segment, when we analyze the market as a whole will reduce in size this year. We don't have funding available. The cost of this funding is larger. Banks have to pay income redemption here, savings accounts from savings accounts here, but reducing the purchasing capacity, purchasing power for our customer. Our customer that is buying our product, has to have more income. So our addressable market is reduced here, but there has been an interesting phenomenon. When we look at the macro, we know there is this concern.

And when we analyze '23 in the mid-income segment, we have tried to reduce its representativeness and increment of share of participation in Minha Casa, Minha Vida launches. You should see a greater mix here, right? Models are now less Riva as a share of the total. But because of credit restriction scenario, we have been going through, my impression is that those companies that have access to the [indiscernible] will have a huge differential in a smaller market, but there will be a very relevant lack of company funding, right, [indiscernible]. And we believe that when we have continued in the company being very conservative with leverage huge focus in cash burn generation, we will be a company that will have access to this resource. And I believe to access to the [indiscernible] will be the differential. And eventually for those that won't be able to operate in this segment.

So I believe that those that can perform here will certainly have success in the project. So I would say -- I said this to the market. The market was very concerned with the scenario. Of course, the macro is very challenging. But when we look at the opportunities here, when we look at the company as a whole, I think that we have to wait to see what's going to happen with the supply of this program. But I think we might be surprised and have a performance right, I would say, the projects in advanced approval stages to have products in the market we have. So depending on what we are able to see during this year of '23 from the point of view of demand and credit granting, I think that we can touch on this mix depending on what we will be able to deliver in terms of return SPE and SPPS and Minha Casa, Minha Vida.

But here, I think we have to analyze what's going to happen because I've noticed a reduction in the recurring supply, and we have to see where we're going to have this balance between supply and demand in a smaller market, but I believe where we can have very attractive returns to operate in this segment. Let's wait. So when we see a fourth Q, Direcional performing better, gaining shares in our sales, when we consider January and February, we have operated with us in Direcional share over Riva last year -- compared to last year. But here in March, I see a very positive performance. Let's wait. It's early to come to conclusions, but perhaps we might have an even better performance than the reality we are prepared for in this company.

[Henrique Paim, executive]

[Interpreted] Ricardo, if you will allow me just to add to this, Bruno, I think that this comment that Ricardo said about the cooperation is very strategic [indiscernible] PJ. And we've had new PJ suppliers. We have new potential suppliers, which we should inaugurate very soon. So we will go from just a very few pockets to greater -- more money here, more PJ corporate supply.

[Bruno Mendonca, analyst]

[Interpreted] So I was going to ask exactly this question, if this PJ or corporate money was concentrated in cash or diversification. What is this diversification traditional banks or funds?

[Ricardo Valadares Gontijo, executive]

[Interpreted] Traditional banks, and one that you represent is one of them. And there are some other banks to regional banks. Developing and very close to the pilot so that we can launch projects. So when you have a scenario 5 years ago, where we had one single supply SPBE. Now we might have 5 SPB scenarios, right, supplier of scenario. So this helps us in our funding source. It diversifies our risk because we might have a player with less appetite. So I believe that this supplier portfolio gives us -- is a strong element. Since we're not very leveraged, we have a very stretched debt. These banks have a lot of appetite of raising credit for us, raising funds for us. So we are very excited here to increase corporate suppliers.

[Paulo Henrique De Sousa, executive]

[Interpreted] Next question. Fanny, Banco Santander.

[Fanny Oreng Avino, analyst]

[Interpreted] 2 questions. First well, you have -- Ricardo has talked about the VSO and the net sales speed, speed of sales. So what I want to understand is, how do you see this trend, margin recovery versus speed of sales? Would it make sense to work with flat margins? To deal with Riva where you see the scenario was challenging. This is my first question. Second, with regards to PoC, percentage of completion. How do we see a trend of revenue recognition in the 2? And what is the impact of the sale of the SPE have with revenue? And also regarding rains, right, here in the Southeast, the situation is very serious, so there might be a strong impact. That's it.

[Ricardo Valadares Gontijo, executive]

[Interpreted] So Fanny, first, with regards to margin versus speed of sales. Well, it's important to make very clear here. In spite of this reduction of sales, net sales in the fourth Q versus the third, I am not concerned with the products we launched in the fourth Q. There was a huge concentration of Minha Casa, Minha Vida, and we have had the best first quarter in the company. It's always very important to make this clear. The seasonality we have in the sector. But January and February are very different than the sales performance we've seen January, February '23 compared to the previous years. So maybe we might -- we've had a VSO of around 12 sales that have dropped. Of course, when this happens, you're not very sure of the impact from the elections and the Cup.

We see a first quarter that is very positive in terms of demand for our products. An interesting point to stress here, 1.3% growth of gross margin -- adjusted gross margin comparing fourth Q to third Q, an important tipping point. I would say it was expected, but it's difficult to say when this is going to happen because of our sec's cycle and our mix effect. RF was 0.1 of the REF margin, backlog margin. So it's important to make very clear. We're working to deliver a very healthy margin. It is even over than what I always say should be the recurring margin of the business, which is 34%. We did 36.332.2 percentage points over.

And also, in this moment, with very high capital cost, low visibility with regards to what is going to happen to interest rates from here on, global scenario. And considering an inflation that is benign, the increase of VSO of speed of sales make sense with stable margin, half percentage both here down or up, this is natural, but a stretch for the speed of sales would generate more value for us than a search for margin with a loss of VSO and the need to allocate working capital in our project. We go for a greater gross margin demand for capital. And then you have financial expenses hurting, allowing us resulting in a much more leveraged operation.

So I think margins are very healthy, very solid. And VSO is a priority for us, so -- so the need to return capital in the last years, right? This has been a priority. So here, we have a leverage in the levels that we've worked in. In the fourth Q was below 13%. We paid dividends in January, but this is what we have been trying to do in this environment, we hear. If capital costs drop, then we will rethink of what can make sense from here on. As of now, I think this is it. PoC Fanny, so when we -- PoC is percentage of completion and rain both for us in the states we worked in have had greater rain impact than the third Q. Sao Paulo has had a lot of rains. It has caused a lot of damage in the last years in the New Year, now in Carnival. The problems in the North Coast of the Sao Paulo, the third Q had more, fourth Q had more rain than what is happening now. It's incomparable. But I don't believe that we can say that this impacts the PoC. Obviously, we begin work in April.

So what we launched in the fourth Q and is being launched in the first Q will not have revenue here only from the land here. So it's -- the revenue will grow more in the second and third quarter, but normal life for the works that are ongoing. There has been no impact because of the rain or what I can say can justify any kind of revenue reduction. I think everything is going very -- in a very normally in this first Q and the first highlight of the sales that have performed better than the first Q of the previous years. And also, I believe we're going to have a growth of revenue in '23 at a much better pace than '22. So I think that is what we've been saying, this growth will be very strong in 2023.

[Fanny Oreng Avino, analyst]

[Interpreted] Yes, growing during the semester?

[Ricardo Valadares Gontijo, executive]

[Interpreted] Yes.

[Paulo Henrique De Sousa, executive]

[Interpreted] Okay, next question, [ Nel Gasparich ].

[Unknown Analyst]

[Interpreted] 2 questions. The first 1 is to understand how you see the margin and cost dynamics. We have seen the cost of material dropping. I want to understand how you see this is going to happen during the year. And if we have room for the reversion in terms of economies of the works in the second semester, beginning of '24 because of the inflation levels, budgets that were higher than before. And also the expectation of the announcements of Minha Casa, Minha Vida conversations with regards to the reduction of subsidies in Level 2. So what is your expectation here relative to these 2 matters here?

[Ricardo Valadares Gontijo, executive]

[Interpreted] So we have noticed, and I would say in an even more relevant way in the last 1.5 months, reductions of product cost reductions. This is positive. We have several products where we have been able to negotiate reducing prices and we will continue working with this effort, I think the competitiveness gaining in terms of cost will help us to see 2 families that at a certain moment, we couldn't because we had to raise the price -- the sale of the prices of our products. But it's a little early to talk about the reversion scenario here, right? I think 2023, this is a more recent movement. I don't think it's probable that we're going to have a movement here in this sense.

In our budget, we always consider the expectation of future INCC because of our revenue being paralyzed here because of the sale. But I would say that it's a little early to imagine that this INCC can be reverted. So we -- I think we have had a reversion of the budget relative to 2018 and 2019 but I think it's early to think of this. When we consider '24, we have to be clear with regards to the intensity of this reduction of cost of products that we buy in spite of things seem to be very positive. And that's what has led us to go after VSO, a fast VSO and reducing the capital of our projects. And here, we want to shorten the duration of our cash flow in a very high inflation scenario.

But I think the focus here will have a greater impact than any movement where when things of a reversion of budget, right, we're in a very new process in this product reduction cost relative to MCMV program. We've had signs here. The Chief of Staff, [indiscernible] told us about the possibility of eventually using part of these resources approved in the transition to complement subsidies granted by FGTS, Level 1 and eventually to Level 2. I would say the following: In case this happens, the impact will be very relevant in the gain of VSO and our capacity to see to families that have much lower income than the families we see to today. When we reduced the income necessary so that our customer can buy our product.

The impact is BRL 30, BRL 40 in the income. Many people enter this addressable market. So I think that we still have ongoing 2 measures that might have a very relevant impact in our MCMV segment. This is one of them. The other one is the future FGTS. I would say both of them have very -- have a capacity of impacting the MCMV operations in a very significant way. It even the 420 months. So -- let's see the implementation of the use of complement here to the subsidies and the future FGTS. But these are news, in case they do come about, they certainly might impact the operations of all of those here that are operating within the program.

[Paulo Henrique De Sousa, executive]

[Interpreted] Next question, Gustavo Cambauva, BTG.

[Gustavo Cambauva, analyst]

[Interpreted] I would like to ask a question with regards to the discussions asset monetizations agenda, a sale of portfolio, you also sold the SPE, you have [indiscernible]. I would like to understand how you see this for 2023. What you have here in terms of expectations to accelerate monetization of assets doing some kind of specific transaction. And here also, I would like to understand how you see the target here in terms of leverage? Because in the last years, you grew the company a lot and you continued paying dividends. So I would like to understand here, with regards to current indebtedness, what's going to happen with the company from here on? How is it going to work in this sense, higher rate -- interest rate scenario? Does it make sense to reduce this -- reduce the payout?

[Ricardo Valadares Gontijo, executive]

[Interpreted] I think eventually -- Paim can add to my answer. Well, capital cost is very high. Somehow, to monetize these assets via receivables or SPEs, we have been able to work with discount rates that are significantly lower than our capital cost. So when one maintain these discount rates, we have been able to continue selling. And also, I would like to apologize to [ Fanny ] because this is one of the points he asked about and I didn't answer. I would like to say to ask the question she had asked. So we have an expressive amount of equity invested in land, still board in 2015, 2016. Equity allocated in a land without the launched project does not generate revenue, nor results, much to the contrary.

So to be able to maintain the land has a cost. So we do carry part of -- we don't generate return here. So when we have a project that is launched and most of the risks we have, approval rate terms and everything. What we have is only the execution of works, and we can give security to the potential buy. It is important to anticipate this cash with this discount rate we've had, and we will continue doing this. Also see the revenue of the fourth Q was lower than expected. Yes, we sold less. Less than the third Q. I think it's natural. In my view, the margin has a strong value. So this sale that didn't happen in the fourth Q might happen in the next Qs. Margins have been very solid. So we haven't lost the result. We just deferred it. I think it's better than lose margin.

Fourth Q, there was an impact in our revenue. And the sale of 3 SPEs, of which revenue went in -- was not included in the fourth Q, but in other revenues. So when we can anticipate the profit from this project, this is value generator, and we will continue returning capital to our shareholders, try to maintain our book closer to stability as possible. But it depends on the growth of operations, 1 year or the other where cash generation might not be in the same level as net profit. But when we look at the next years, everything has been stable, payout has been high. This is 1 of our priorities here, and we will try to continue delivering the highest payout possible as long as it makes sense to sell these assets with discount rates. So otherwise, we will wait for more adequate moments to sell these projects. Is there a point here? I don't know if you'd like to add this Paim.

[Henrique Paim, executive]

[Interpreted] If you will allow me, Cambauva, we've been talking to you that this -- the capital is a priority for decision-making, dividends, buyback investment, we will not abuse from leverage. What we have been doing in the last years, specifically in the last slide that you saw when we generate cash, we closed the fourth Q with 13% net debt over equity, distributed BRL 104 million dividends, went back to 20% net debt over equity. This year, if we are successful with our plans, we will generate cash, reduce leverage, pay dividend, reduce the equity, and we will do this gradually. But we'll be doing this as long as the discount rate for the sale of that, it makes sense. So we intend to continue with low leverage. And so I think that we should maintain the operations, not very leveraged without extrapolating these numbers going over 20% that we have been doing in the last quarters.

[Paulo Henrique De Sousa, executive]

[Interpreted] Next question Pedro, Credit Suisse.

[Pedro Hajnal, analyst]

[Interpreted] I have 2 questions that complement the previous ones. So if you can share us the rationale behind the sales of the SPEs, if it was to strengthen past generation or what projects that were not so well and the opportunity emerge. And also, what are the types of sales we can imagine from here on based on this model? And then with regards to margin, you said that the priority is to speed up the sales of Riva. When you have a flat margin of around 76%, up to what point can we imagine a lower Riva margin, a low income margin absorbing this so that consolidated can remain at 36%?

[Ricardo Valadares Gontijo, executive]

[Interpreted] Pedro, I talked about this with Cambauva but to add to this. If we have the opportunity to sell assets with discount rates lower than our capital cost, we will sell because in our view, this generates value and has allowed us to grow, continue returning capital to the shareholders, maintaining -- being closer to stability, allowing our ROE to grow because of the increase of net profit and maintenance of booking at a level -- stable level. And if it makes sense to generate value, then why not sell these assets where we have very expressive equity allocated and because we have a lot of equity here, the return of the capital here is lower than the return that we deliver in projects.

So we are getting a bit demanded in the past learning with our trying to learn these mistakes, not to commit them anymore, but projects with margins, allocated capital, the cost of this capital, you sell, you have the capital and allocate it in new projects that will give greater returns or return it to the shareholder. This is the reasoning here behind of what we've been doing. And the idea is to continue doing this discount rates are not prohibitive. Riva Direcional margins, in a normal context, we should have Riva with margins over Direcional because SBP projects demand more capital. And there you need more margin. Of course, in time, you can have different scenarios that make you escape from this logic because of the context we have to face.

I would say currently, it has made more sense to allocate capital in MCMV project because of the uncertainties with regards to funding availability, the reduction of our market demanding greater demand of customers, greater money, more money from customers to be able to buy our products. But I think there are positive aspects here in this market. The market has reduced in size, but we can end up performing very, very well. It is difficult to say what's going to happen with the product missed work with more margin in one segment and then so then we can have similar speed of sales, right?

I don't see any problem working with lower VSO in Riva now. I think what we are going to avoid is having stocks here in this segment, but Riva VSO lower than Direcional, it's under control, it is card and it's natural. I think it's difficult to talk about margins. In the first moment in our projects, we see opportunities with MCMV. We are cautious with the mid-income family. We have to see what's going to happen to supply the amount I'm sure of, but I think we might have a relevant reduction of supply. And this might mean opportunities even in a segment where macro might be going against this. But we can generalize things and believe we're not going to have opportunities yet.

[Pedro Hajnal, analyst]

[Interpreted] Great. Just a follow-up question. What would you say is a commercial strategy to accelerate to speed up Riva? Discounts?

[Ricardo Valadares Gontijo, executive]

[Interpreted] No, we're not applying discounts, Pedro. Let's wait. We've got in January, February without discount.

[Paulo Henrique De Sousa, executive]

[Interpreted] Next question, Ygor from XP.

[Ygor Altero, analyst]

[Interpreted] 2 questions here. The first 1, the [indiscernible], the risk that you see here -- working with a high number of units, do you believe the local government would call Caixa to operate here? How do you see? Second question has to do with launches. Do you have -- the Riva operations will be lower this year, but with Direcional compensating things, would you have room to grow the pace of launches this year relative to last year? So if you could tell us about this first quarter because in the fourth you launched a lot, and this first one, the strategy is to reduce launches a bit here?

[Ricardo Valadares Gontijo, executive]

[Interpreted] Ygor, because of the structure that was set up as published, we are very comfortable with the risks. So we presented projects. And in case our projects are chosen winners here, we are very excited with this operation. I think this is something we have to do. We delivered a lot of value during Level 1 period. We don't see risks. They have been mitigated. We have received proposals from private banks to operate the escrow, and it's under control. Now we are waiting for the disclosure of these results to see how our projects were qualified. So first quarter, we launched less, right? We have Carnival, we have New Year's and this is seasonal. Every year, this ends up happening, and it's novel.

Our fourth Q had strong launch volumes. So here, what we want is not launch simply to launch. We don't have launch as a priority in the company. We launch in case we notice a strong demand for the product, so to have inventory because of everything we said with regards to prioritized cash generation this year to have inventory here -- to build the inventory here makes no sense. So we have a project volume to be approved this year. And in case there is a demand, we will certainly operate with very similar levels once that are overlap -- superior to last year. But we don't want to say because it will depend on the market, the demand and credit availability.

In case there is, we had the conditions [indiscernible] this demand in spite of the fact, and it's important to stress in the next 2 years, our priority is not to have such a relevant growth of launches like last year. We want to execute everything we grew in terms of launching sales in the last 2 years with the efficiency levels that we have delivered in the last years. So I would say that the greatest value we generate here in the company is have our revenue getting close to our large levels with the maintenance of the margins that we have been able to deliver and also capturing gains, operational leverage gains in our expense lines. So priority and maintain efficiency in execution more than growth. Although we have projects and sales structures to eventually deliver in case there is a demand, very similar numbers or more -- slightly more than we had in last years.

[Paulo Henrique De Sousa, executive]

[Interpreted] Next question, Rafael from Safra.

[Rafael Une, analyst]

[Interpreted] I would like to do a follow-up. Talk about the states you work in. I remember the fourth Q, you said that Sao Paulo was more -- suffered more pressure; Rio too, Minas Gerais went well, Brazil Manaus. So how is this first quarter? Is it similar? Is this due to -- should this change the representativeness in these states here in the beginning of the year?

[Ricardo Valadares Gontijo, executive]

[Interpreted] I would say we have we've had improvement in our operations performance in Sao Paulo. From the point of view of speed of sales. Sao Paulo was a state that demanded more capital, specifically with the purchasing of the acquisition of lands. So the return is slower when compared to other states where we didn't have to disburse so much equity to buy land. But our market is balanced in Brazil as a whole. However, we've seen opportunities that can be used in other less obvious markets. And we've had -- we've performed better in these places.

In terms of operation scale, Sao Paulo and Rio have huge scale possibilities greater than other states, right, and end up compensating more capital need at a greater scale, diluting our G&A, greater dilution of our sales expenses. This is not happening yet. For '23, I think Sao Paulo and Rio will have representativeness, huge representativeness in our launch. But when we compare the size of the market for the volume we're launching, I would say our share in this market is lower than the participation, the share we have in less obvious markets. Although absolute values of launches, Sao Paulo has very good representativeness here in these companies, right? They are the largest state, but it is one of the 3 or 4 main areas here in terms of operations, right?

I think we could be doing more than we're doing the less obvious markets. And the return that we have noticed in these areas over allocated capital is lower than other states. We've tried to have greater representativeness in other states than in Rio and Sao Paulo. But this should continue being a trend, although we've noticed better negotiation conditions of certain areas in these 2 states. Land prices dropping, less need for equity to acquire the land. These are cycles, right? So we are, at the moment, we eventually should focus in new land band projects. Specifically now where things are more balanced, less companies going after projects in the cities. But as I would say, the other states have been able to deliver greater returns here.

[Paulo Henrique De Sousa, executive]

[Interpreted] Renata Cabral from Citi.

[Renata Fonseca Cabral Sturani, analyst]

[Interpreted] You already talked about the top line of the fourth Q. -- you've felt a reaction in the first Q '23. I want to know if you have already felt the effect of the cap increase in MCMV? Is this the main reason for having a stronger beginning of the year? Second question would be your impression with regards to measures that have already been approved relative to MCMV as an extension of 5 years in terms of amortization of FGTS. How do you see Caixa doing the -- how is the perspective of Caixa doing the rollout here?

[Ricardo Valadares Gontijo, executive]

[Interpreted]Renata, I would say that the increase of the cap in the program that happened in the fourth Q, 5% of the cap of 264 considering Rio, Sao Paulo in Brazil, there's no impact in the demand. There was no change in interest rate, subsidy increment, financing term, but increase is right to be able to work with certain products. These products could be unfeasible because of cost increases the sector went through from mid-2020 to end of '22.

Now it will allow us to certain projects to be able to fall under the program. So I think it's positive from the point of view of having more projects falling under this program and a gain of representativeness of MCMV, right? When we look at our mix, as a whole, demand is just to render feasible project, which was feasible before. With regards to Caixa, I would say we have a very qualified team in Caixa, very experienced. We had a transition the -- we had a government transition or transition from the presidency of the bank, too, there was no impact in the Caixa here. This is work that it's really an example. It's a reference to the Caixa team, what they have been doing, right? There is no doubt.

I can talk about this here. With regards to everything, right, so things have been happening in a very surprisingly positive way. No impact whatsoever. With regards to the implementation of measures approved during last year, 35 years price-rise is already in effect and the FGTS now with all the Vice President is defined, the team established, the whole team established, I am sure that this will go into effect in the fastest time possible. It's difficult to say when. What I would say is that this program certainly has a capacity of have impact in the products that have target families of income of up to BRL 2,500. This is very significant, will be very segmented, but we'll see the policies here to be able to measure the size of this impact. But I think certainly, this allows us to be very optimistic with regards to the segment specifically.

[Paulo Henrique De Sousa, executive]

[Interpreted] Next question, Jorel, Goldman. [Operator Instructions]

[Wilfredo Jorel Guilloty, analyst]

Well, I have a question. I want to understand how much more Direcional can grow in terms of sales? What are these conversations that are happening with regards to MCMV implementation? What is the best outcome here for you? How much more can the company grow? Can you see the company growing 50% in launches or would you be growing gradually? That's what I want to know.

[Ricardo Valadares Gontijo, executive]

[Interpreted] Growth, I would say, when we analyze the level of launches we had last year. is not a priority anymore for the next 2 years here in the company, okay, in terms of value square meters launched, it should remain stable. When you look the PSV, there might be an increment closer -- price increments, so something close to inflation. But our priority here is execution and an execution with the least demand for working capital possible. And so eventually looking at the opportunities that make sense. So we do not see the value being generated due to a continuity of growth at a very accelerated pace because we know execution in our business is critical and it is the key of everything.

So we're reaching launch levels that puts us in a constructed area growth in the next few years, which is relevant. And we'll demand attention here from our team so that we can continue with this journey. And so that we can have comfort here. So we always have to be very careful. No matter how many changes in the program, we will analyze opportunities and eventually change the product mix, but not grow over of what we are capable of being able to execute. If we look at the -- to look at those projects, it will give us greater return than what we allocate makes sense, but to grow. And apply all the efficiency that we have had to deliver works that wouldn't make sense.

[Paulo Henrique De Sousa, executive]

[Interpreted] Now we have come to the end of our Q&A. So I will go -- I think we have 1 last question, Andrea from Itau.

[Unknown Analyst]

[Interpreted] I would like to very quickly ask you with regards to what you said in the beginning. The expectation of the reduction of minority interest from here on. How is this related to the stake? -- this year is very relative, right, 85%. So could you just tell us a little bit about that?

[Ricardo Valadares Gontijo, executive]

[Interpreted] Andre, when you get the share of this minority risk interest as a proportion to our net profit is 30%, right -- BRL 30 billion relative to BRL 206 million. So almost 30% of our share -- when we look at what we have launched, we've seen the minority interest going to 15%. And this year 2023 should go to 10%. Perhaps it might make sense to launch 1 project or the other and then you can vary this number. But you will see that in time, you will see minority interest going down to 10%. Of course, we're going to continue with projects with partners, if it makes sense. But I would say representativeness here year tends to be reduced. And you can see where we have partners, but not consolidating the revenue, you will see here this growing.

So from here on, there might be an operational leverage gain, commercial sales expenses. And with regards to minority interest and financial expenses since we don't have the expectation to have an increment in our leverage, revenue growth and our sales expenses remain constant or if it drops, if we have a reduction of interest rate in the country, I would say that these can be lines where we can have greater relevance from the point of view of margin -- net margin gains. So we went -- they went almost from almost 25% to 10%, the minority interest drop from 25% to 10%.

[Paulo Henrique De Sousa, executive]

[Interpreted] So now to close our Q&A, I'll give the floor back to Ricardo for final considerations. Thank you, everybody.

[Ricardo Valadares Gontijo, executive]

[Interpreted] So I would really want to thank you for your participation. We had a very healthy Q&A session. Excellent questions where we were able to address several relevant points here in our operations. We are beginning 2023 with positive expectation, specifically with regards to Minha Casa, Minha Vida program. We will analyze how this is going to occur, the mid mid-income segment. But the possibility of being able to migrate from one segment to the other and using all the opportunities is one of our strong points here. So we are in the beginning of the year. There are many opportunities we're going to try to take advantage of. And I'd like to see that our operations have very positive perspectives from here on, and we expect to deliver the results -- very good results in the market we work in. Thank you very much, all of you, and have a very good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]