MRV Engenharia e Participacoes SA

BOVESPA:MRVE3

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome. Thanks for waiting and welcome to the conference call for analysts and investors of MRV about the results of the second quarter 2021.

Today with us, we have our President, Rafael Menin and Eduardo Teixeira, our CFO and IR Officer. [Operator Instructions]

Now we are going to turn the call to the President Rafael Menin. Please, Mr. Menin, you may go on.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Good morning, everyone. Thanks for attending another earnings release of MRV. Well, as you saw in our reports, I have been noticing some concerns from analysts about the sector. I myself am very optimistic. I am quite confident that we can have a very special decade for the housing segment in Brazil. Brazil is barely going to a new normal of interest rates. We were reduced to interest rates of 15%, 12% a year. And more recently, we had the Selic rate that was at the lowest level ever. And we don't know what our stability is going to be 6.5, 7 or 8. But I am sure it is going to be well below the previous decade.

Well, if you think of it, we have very good structural reforms in the countries, some better, some worse, but they will all reflect on a better country for the future. And interests are very important for our sector. Another important point is that we went through a very complicated decade, an economic period that lasted 4 years that pressured income and the consumers' confidence. Despite all that, we had last decade much better numbers than the previous one. Last decade, we had 6,000 units a year. And I think that in the next 10 years because of lower interest rates, the recovery of economic growth and explosive demand for housing.

In Brazil, we have 1 million families being established a year. So I think it's easy to say that our sector is going to be growth -- is going to show growth of 40%, 50% in the decade. So I'm quite optimistic. We are in a sector, given all these factors, that is going to grow a lot in the coming years. And the most prepared companies will certainly serve this way of growth. I do not see today any other company that is as prepared as MRV. We are operating 160 Brazilian cities with very mature structured operations, differentiated teams. More recently, we started to expand our portfolio that has been very important for the company. Of course, this is a more complex than it was in the past. But we do have this possibility of accessing the capitals market going to real estate funds.

In the case of Luggo, having a growing portion of SBTE, the biosensor. We are having a very good result with sensor products. We are operating in several towns. We can be more aggressive in markets with lower competitiveness, which is a major differentiator. And it is unique of MRV. We can talk about Urba as well that has had brilliant performance in the first quarter. We launched a development in [indiscernible] the second quarter, another one in Campinas. And we have a very strong pipeline for the third and fourth quarters.

Urba has different mode of operation. Everything we launch, we sell everything. We have a 44% gross margin in Campinas development above 50%. So this portfolio of products, Casa Verde e Amarela program, Luggo, Urba, Sensia, all that really place us in a differentiated position compared to other companies that operate in the sector.

In addition, MRV is the only company that operates in 2 countries. AHS has been showing quarter-on-quarter a phenomenal evolution. We already had the sales of 2 developments in the second quarter. That much contributed to our net income. We have other 6 developments on sale. And sales will take place along the second half of the year, perhaps something for the next quarter -- for the first quarter next year. And more and more, we are seeing that funds are buying developments.

Before stabilization, we would only be able to sell 6, 8 months after the completion of development. And now we have been contacted to sell 2 developments that did even have the housing permit yet. So the demand for housing, this home workforce, is really exploding in these states and there is no sign that demand is going to cool down, quite the opposite. AHS ramp-up has been quite accelerated. We are now going into 2 new states, Texas and Georgia, starting already developments there given the speed of approval of licenses in these states.

So we are talking about Brazil with a very strong decade in housing, we are talking about the U.S., a giant country, a giant market, and AHS with a very unique operation, a vertical company that has it all to have an increasing impact in our holding. Perhaps AHS in the coming years may even have a percentage of income that is even higher than Brazil. So that's very likely to occur.

So for all that, again I'm quite optimistic. I'm sure that MRV call will response better and better results for the coming years. And the next years are going to be very strong. I think that we cannot see the landscape in the short term. Otherwise, our vision is a bit blurred. So I think that we are going to have more comfortable times for the future, a reduction of competition. If our margin is tighter, imagine smaller companies that have much more difficulty and less efficiency to navigate times with lack of inputs and pressure from major providers. We certainly serve the way much better than the competition.

And if you take the snapshot of the time, it tells one thing. But for the future, the gross margin will come back in '22 or '23. So the margin is going to be a bit more compressed this year. I don't think it's going to change this year. But for the future, if you see into the future, I'm sure that the MRV margin will come back to what it was 2 years ago.

And also I would like to talk about ESG initiatives. No other company in the sector has such an agenda, not even close. We know how important this is in Brazil. We have many problems and MRV is really conducting very interesting work together with Brazilian Society and business will continue to grow. And also our investment in technology, I mean lots of good things to happen in the coming years. This is an agenda of low visibility to investors, but I can say quite confidently there's no other company that invests as strongly in technology, especially counting on our database. We have more than 500,000 apartments. And lots of good things will come from our technology agenda.

And to close my opening remarks, you take a look at our price book of 1.5x MRV worth closer than what it was in 2010, market value. And if we look forward, I can say that we are very poorly priced, not only MRV, but the whole of the sector, the housing sector has so much to deliver in the coming decade, with such great foundation should be priced in my opinion, 2.5x, 3x higher. So that is my message of optimism. Of course, we are concerned about the short term. We are working very hard on that. But if you look a bit into the future, I'm very optimistic. We are doing our homework to prepare for a strong side of growth that we are going to serve in the coming years in Brazil and the U.S.

Now I'm going to turn to Kaka that he is going to talk about our financial indicators.

[Ricardo Paixão, executive]

Thank you very much. Thanks, Rafael. Good morning, everyone. I would like to start about talking about the increase in production, 15% compared to the first quarter and 30% year-on-year. Sales continue at a high level. And with that, we had this historical record. This increase represents an extension of 14% compared to the first quarter 21% and 10% compared to the 2Q '20. This increase in net revenue and a higher dilution of SG&A made our net income in the Brazil operation to be in line with our previous quarter.

Net income of the Brazil operation, together with AHS, made the company report net income of BRL 200 million for the second quarter '21, a growth of 86% compared to the previous year and 48.5% compared to the first quarter '21. Annualized ROE of 14.1%.

And now I would like to talk a bit about gross margin. So we are going through a huge inflation pressure. And with that, we compressed our gross margins. If you think of estimates and budget, we estimate an inflation within our budget. What happened is that the estimated inflation was below what was observed in the coming -- in the previous quarters. As of the third quarter '20, the inflation pressure was very much. Our IPCC in these last 3 quarters is in that 17.3%.

The idea of MRV is to take consumers to the financing banks. With that, we optimize cash and we protect ourselves against constellations. But there is a side effect. After there is the transfer to banks, we do not have any possibility to correct contracts, and we are exposed to the [indiscernible]. So when we noticed that the inflation pressure was above what we have expected in our budget, the company decided to review the budgets of all its development. So once the increase of prices was implemented in the -- I'm sorry. Once the increases implemented were below inflation, we had a compression of gross margin. So now we are revisiting our prices, try to offset at least partially this compression.

As a subsequent event, we had the sale of MRV's credit portfolio. We announced that in July, which is a very unique operation with ratings AAA of filter rate. And then the amount was BRL 241 million, BRL 43 million regarding with the expenses with reserves. And with that, we had a net cash of BRL 200 million in the beginning of the first quarter. That was one of -- that was not a one-off operation. We believe it is a program that is going to be followed by several similar operations in the future.

I thank you very much, and now we are going to open for your questions.

[Operator]

Thank you. We'll now start the Q&A session. [Operator Instructions] Our next question comes from Alex Ferraz from Itaú BBA.

[Alex Ferraz, analyst]

I have 2 questions. First, on the release, you make a question about the inflation pressure, talking about a more aggressive price policy implemented in July this year. Could you give us a bit more color about the expansion of this new policy if you're being more specific in FGTS units? We know that competitors are having great difficulty in this area. And do you think you're going to have more inflation pressure? Or do you think you have more possibility to pass on prices because the competition is weakened. And also the -- something that Kaka mentioned. Are you talking about expansions of platforms you're talking about new launches? Or if you have anything in the construction cycle in 2019, we saw something like that. Because generally, when we revisit budgets, we changed a bit of the natural evolution. But I would like to know if there was something in construction or it was just operational.

[Eduardo de Souza, executive]

Okay. This is Fischer speaking. Okay. Let's start with your first question. Price policy. Indeed we have been readjusting prices in recent months. But at the turn of the month of July, we were a bit harder on new prices. And in fact, we are testing market limits. What you did mention and its true increase in smaller cities is easier because we see lower competition. Generally, you have smaller mid-sized players, which enables us to have better prices. But the clients from FGTS, they do have a limit of income, and we are casting the limits. If you have less competition, it is easier. As we are testing prices, we have been observing that volumes are not going down. So we believe at this moment we'll stay, and we are going to go back to having a rate above inflation for the new unit prices.

As for the FGTS that you mentioned, indeed the lower the income, the lower the price elasticity that you have. This is another advantage of our platform. You have units from sense and even from urban, the launch that Rafael mentioned in the opening, we are selling plots of land at BRL 800 square meter. So it is a different game. In some units, we are passing on more prices. There's not as much. But on average, we have a positive trend, and we are going to carry on with it as long as it does not affect the volume of sales. And this is what we have been observing so far.

As for revenues, Kaka did talk about the increase in production. So we are keeping a very high pace of sales and also production is picking up. Last year, we had a series of effects, especially the pandemic that did affect our production somehow. But this year, we started at a much faster pace. And obviously, this, when production gets closer to sale levels. In basically, the income is pulled up. So it's also driven. So revenues at higher levels, but production as well, especially in the first 6 months of the year. And I believe that this is going to be true for the next 6 months of the second half of the year. I hope I have answered your question.

[Alex Ferraz, analyst]

Yes, certainly, Fischer, very clear.

[Operator]

Our next question comes from Daniel Gasparete from Credit Suisse.

[Daniel Gasparete, analyst]

I have 2 questions on my side as well. First, I would like to understand this budget reviews. What do you expect that is coming for the future, given the pressure on prices? If you think that you have more view for revisting prices? And second, I would like to understand your margins for new developments, especially after you revisit process.

[Ricardo Paixão, executive]

This is Kaka speaking. Okay. I think I can answer your 2 questions together. As we reviewed budget, what we size that everything that we have in terms of increased cost of raw materials have already been included. So we don't have anything that we know is going to go up or that has a positive trend that has not been passed on to new estimates. Lots of people are concerned about renegotiations of steel. We are past that. We have no expectations of increases for the coming months. This is already in our budget. Both are ongoing and starting constructions. Margins for new developments. Well, the trend is to have higher margins than we have today and for a simple reason, Gasparete. These units also have the possibilities to have increased prices. Ongoing units are already sold and transferred to clients. But the others, we can still increase prices before transferring to clients.

[Daniel Gasparete, analyst]

If you allow me a follow-on. Are you thinking of a higher inflation for the next developments or are you expecting that this is going to be the same as we have now?

[Ricardo Paixão, executive]

We, in the past, would have a 5% cashing for inflation effects. Now it's a bit higher. But no one expected 17%. That was really out of the expectations.

[Operator]

Our next question comes from Bruno Mendonca from Bradesco BBI.

[Bruno Mendonca, analyst]

I have 2 questions on my side as well. First, it's a question that might be a bit theoretical, talking about the Brazil and margins under pressure. I understand that there is some expectation for some relief in the long term. But theoretically, I would like to understand your mindset. I think the concern is when the drop of margins can start hitting volumes. So the question is, what level of gross margins? If you do have the mass, what make you decelerate launches or at least delay them to wait for better times? Somehow, what I want to know is if you are considering what return you think is satisfactory for each product? I understand that part of your answer has to do with the diversification of products and geographies that have been really important for you. AHS somehow offsets some domestic problems. But do you think a product isolatedly? Or do you see the platform as a whole when you decide to accelerate or decelerate your sales?

And second question about the sale of the credit portfolio that was announced last week. I understand this is a step by step, I thought it was a very positive sign. But the first sale was completed with a very strong guarantee structure. I believe that for our portfolio sales to continue to grow and become more relevant, perhaps you should have less guarantee for the mix sales. Am I wrong in my understanding? But the question is, how do you see this market in terms of sales of credit portfolios?

[Eduardo de Souza, executive]

Okay. First, your first question. That's a very good question in fact. Volumes. So what is the major difference of MRV compared to other listed companies? Geographic dispersion and expanded portfolio. That gives us the flexibility of being more aggressive in markets that are more favorable to us in terms of supply and demand, and a bit more conservative in those markets that are more competitive or that have less demand for a specific economic problem in the region. The Midwest for instance in Brazil is really blooming and you have less competition.

So the capacity to be more aggressive in some markets and in some products and a bit more conservative in others will enable us even with short-term pressures, have good operational volumes. But again, we have to take a look at the macro scenario, which is the major concern that I have to have as the company CEO. We are seeing a country there is more recognized than it was in the past with a new normal of interest rates, with economic growth in the coming years. We really think that Brazil is going to have better employability in the future with the recovery of income, although not as high, but all these pillars will make the market to grow as a whole for the future. And certainly, growth is not going to be uniform. Some places are going to be faster. Some market segments are going to be faster, others slower.

So the capacity to operate in so many regions in such diverts product portfolio is certainly a differentiator of MRV compared to other listed companies. And to answer your question part straightforwardly, we do not think there is going to be a deterioration of margin so that that won't allow us to launch products. I believe that we are in the valley now. And from now on, we are going, and we are having already a gradual recovery of prices. And we do not expect another round of price increases at 12%, 15% in the next coming months. We might have some inflation, but I think it's going to be much lower than the last 12 months. And you know all the problems with supply chains, commodities advancing too much. The exchange rate really accelerated. All that led to a very atypical inflation rate. I don't think this is going to happen in the future.

And again, we have the capacity of being more and less aggressive in markets and when I mean markets, I'm talking about regions of operation that allows market segments. You have the Casa Minha Vida, Casa Verde e Amarela program, Luggo, Sensia, Urba, all that gives us flexibility that is much different than competitors that are much more concentrated. I'm going to turn to Kaka to talk about the portfolio.

[Ricardo Paixão, executive]

Okay. About the sale, we wanted to have an unquestionable operation. So we made a point of having this operation with a AA rating and to have the AA rating, we had to have this 3 month's coverage. So that is what happened. And it's a rating and price discount rate CDI plus 2.50 a year. So it's a very competitive rate for this type of operation with the option of possibility of not having AA, but having a BBB. And of course, then we would pay a bit more than CDI plus 2.50, and we would accelerate new issuances. So it was a pilot. It was a test that we made this is a portfolio that has a duration of 22 months. So this operation is going to be closed in less than 2 years. And any excess collateral, so to speak, will come back to the company. So we'll certainly have more operations of the kind, and we can have with lower ratings, even if that costs a bit more higher to us. This is part of our strategy to recycle our receivables.

[Operator]

Our next question comes from Gustavo Cambauva from BTG Pactual.

[Gustavo Cambauva, analyst]

I'd like to ask you a question. It's too along the lines of margins. I would like to understand more bit Sensia, how it is positioned in this contact. You did announce the project of Campinas Maceio, this new development. And I would like to understand in the specific segment. How you're seeing the passing on prices? If this has been better compared to Casa Verde e Amarela program. And also, if you can talk a bit about mix. You have the guidance of size and units in the long term. But I would like to understand in the short term. In a scenario of higher pressure on costs, does it make sense to accelerate Sensia a bit more? And I would like then to understand the margin of these projects compared to the mix of low-income of Casa Verde e Amarella program. If they are very different once the inputs had a very high increase.

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael speaking. Okay. The gross margin of Sensia is indeed better than the Casa Verde e Amarella program. These customers can absorb prices better. They have more savings. They have more of a formal income. And we see banks did increase mortgage rates for individuals. So if that increases 50 bps more, it's so much lower than the historical levels of interest. So in this segment, specifically, they don't have much supply and they do have high demand. So we started Sensia about 3 years ago. And now we can say that this company is going to be very important for our future portfolio. Now Cambauva, it's not either/or. It is surface always going to be slightly higher than Casa Verde e Amarella.

[Operator]

Our next question comes from Fanny Oreng Avino from Santander.

[Fanny Oreng Avino, analyst]

First, I would like to know if you could talk a bit about how you see the second half year about consumption and cash generations. I understand that there was a change in the way that cash disburses payments to you. And I would like to know how much the consumption of the third quarter is related to that? And what is your expectation for the remaining of the year? That's the second -- the first question. Second question, in the long term. And I'm sorry, in the short term. In the second half of the year, what do you think is the impact? And how much should we consider of the gross margins for the second half of the year? These are my questions.

[Eduardo de Souza, executive]

Okay. This is Fischer speaking, Fanny. As for Casa, we did have 2 factors that somehow impaired the first half year. First is the anticipation of the purchase of raw materials that we went very heavily on because prices were going on, and we decided to have raw materials inventory, and that causes some loss. And then the change in payments from Casa. They decided to start transferring prices only after the corporate taxpayers or registers at the notaries office. That takes time. And it does affect our production line. What is important to say is that MRV's business model is naturally a cash generator. As we launch, sell and transfer. And we have been really focusing on transferring clients to banks sooner and sooner because of our management processes, guaranteed sales and et cetera. So we are transferring clients earlier. And then when we start building the unit, you will already start generating cash.

So the model has not changed. We are even more efficient. So MRV regularly generates cash. If you think of the second half year is that we are going to continue generating cash, and we are going to do that at a volume that we still cannot turn. This is for the Brazil's situation. AHS after sales generate cash and -- generates cash and supports the operation. As for margins, as Ricardo mentioned in the beginning, everything that we noticed in terms of price adjustments that had to be negotiated are already included in our paid price metrics. Everything is embedded now.

So what we see to the second half is maintenance of gross margins at more or less the level that we have today. As units are sold at higher prices, according to the new price policy, naturally, this margin will go up. This is our prospect for the second half of the year this time. I don't know if I answered your question.

[Fanny Oreng Avino, analyst]

Yes, certainly, because I thought that once you revisited all the budget, you have a one-off that would impact your margin. And I thought that would be a bit more relevant. So I just wanted to understand this trend from now on. But it's very clear. And with regards to price increase, you're talking about new units, but you also have inventory of units that are being built. They are going to have price increase as well. Yes, certainly. Price increases were overall in all the company lineup, everything. Obviously, as I mentioned in the beginning, some more, some less, depending on the customers' elasticity. But we've revisited the whole portfolio, even things that are under construction. The thing is there are things under construction that clients have already been transferred to banks. And therefore, a pressure on margins, but we repriced the whole portfolio.

[Operator]

Our next question comes from [ Thaiza Alonzo ] from Citibank.

[Unknown Analyst]

I would like to know what is the gross margin dynamics? Because the net margin had a 1% drop. And you said that margins are going to be tighter. So what is the variation between net margin and gross margin? And how the new technologies will affect your margins, if this is already reflected? You talked about steel, molds. So what can we expect in terms of savings based on those new technologies?

[Ricardo Paixão, executive]

Okay. This is Ricardo speaking. You have a net margin that has a relationship to the gross margin, but it's not a direct relationship. If you look at the next 6 months, the effect that you have in the gross margin is similar, but you have the net margin with a difference of 2.5% compared to the gross margin. So what we are doing is that when we reviewed our budget, that had an impact on REF and on new sales because new sales, we expect to have some passing on our prices. And therefore, we think that the new sales will impact gross margin and RAF. So this is what we see today. As for savings, they basically have been used to partially offset the increase of input prices that we have observed. So technology, aluminum molds, the [indiscernible] that we are using in some areas of the inland state of Sao Paulo, the replacement of the metallic measures by fiber glass, dry walls for higher buildings. So all that has been used to somehow offset the increase of inputs that we are seeing and everything taking into account in the projections that we are giving until the end of the year in terms of motions.

[Operator]

[Operator Instructions] Our next question comes from Jorel Guilloty from Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 questions. One is basically more of a general picture. I would like to know if you could talk about the tax performance. That how that could affect the sector? And what are you thinking about possible results of the reform? And in general, how do you think this can affect the sector? And the second question is about the pro soluto, I know this is an important part of your balance sheet in recent years. I don't know if that's still appealing to consumers and buyers. So I would like to know if you still believe this is an important part for the company in an environment where the solid rate is going up.

[Ricardo Paixão, executive]

Okay. I'll talk about the tax reform. First, I did not understand the question about pro soluto very well, but I'm going to talk about the tax reform. What we see is that the first effects that we had in the B, which were the taxation of real estate funds, taxation of dividends that would be sent to the holding. That would affect our sector seem to have been settled. This is not something that we are expecting to happen. So we do not expect this impact in our operation. We don't think this is going to be passed.

Now when you talk about the dividend taxation, this is a broader discussion that affects our sector, but also all listed companies that we have today at the stock exchange. As for your second question about pro soluto, if I understood well, you're asking if the correction of pro soluto is still comfortable for the client. Is that it?

[Wilfredo Guilloty, analyst]

Yes. If you think it is going to continue to grow. If you think it is still going to be used in an environment where the interest rates are going up.

[Ricardo Paixão, executive]

Okay. I've got it. Well, if the pro solute portfolio of the credit portfolio is going to continue to go up. We believe it's going to be stable compared to the percentage of sales. In fact, in recent years, we were able to reduce the portfolio that we are financing. I don't know if you have the opportunity, but there is a chart in our release, which is a drop in terms of the number of installments. So we want a higher lump sum at first to pass on a lesser time for the client. Of course, it would be great if we have a higher STV. We could pass on less portfolio to the client. But what we see in terms of interest rates, thinking of the interest rates and monetary correction. We have the IPCA plus 1% amount. And we are passing on that to the client in full. And we haven't noticed any change in that vis-a-vis the higher inflation rates.

[Operator]

Our next question comes from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 quick questions. First, about AHS. You said that the American market is very strong. I would like to understand about values. If you had an appreciation of valuation of $380 million in development, I know that the caps are also pressured there. And what do you see i.e. in the market thinking of values for the future? And second question is speed of sales. You also talked in the call that the increase of prices had not affect the speed of sales. Do you think the third quarter is going to be as good as the second quarter? Do you think you're going to have an acceleration because the guarantee sales did affect the net sales a bit? So I would like to understand how you see that?

[Rafael Nazareth Menin Teixeira de Souza, executive]

Okay. Motta, this is Rafael speaking. AHS, when we listed the company business plan, we saw yield cost of about 7% and starting cap of 4.85%. You're right, there is a shortage for this kind of product in the American market. And we have been observing a drop in cap. So the pressure of the wood cost is more favorable to us. And on the other hand, this oil portfolio of the company that has not been sold yet has having higher leasing amounts. So if the yield cost is also going up and it's very likely that this new phase for the sales package of AHS will have a gross margin above expected.

Looking forward, we do have inflation. It's very hard to say what the recurring margin of AHS is going to be if we considered 2022, 2023. We are comfortable at the level of 28%, but it might be that short term sales, third, fourth quarter '21 and first quarter '22, have gross margins that are positively surprising. The market is very much heated. We are concentrated in important American cities and we might have a positive surprise there. As for speed of sale, we believe sales should be kept in the third, fourth quarter, similar to what we had in the second quarter despite the increasing prices. If you think of the total of value sold, we are going to have more Sensia products. So if we exclude the effect of the guarantees sales that in the third quarter is going to be settled, the total sales in the third, fourth quarter should be kept at a level that is close to the second quarter.

[Operator]

Our next question comes from [indiscernible].

[Unknown Analyst]

Congratulates on your result. I think that is very clear margins. I had also a question about AHS. But I would like to understand your perception about the performance of the company's shares. You have talked about the buyback program of up to 15 million shares to be closed next month. Because of that, are you think of a new buyback program? Are you discussing that? So where are you at in this regard?

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael speaking. I'll give you my opinion. I think that we are ridiculously low, our shares. We have an open buyback program. The topic is being discussed by the Board of Directors. If it were for our initiatives, AHS or by Luggo, certainly the buyback would be an obvious move in -- for the allocation of capital right now because the 3 subsidiaries are growing and demanding capital. We -- you're not completely comfortable in being aggressive in the buyback program. And at the same time, allocating capital in the subsidiaries that we really believe are going to give us excellent return. But you're right, it's a dilemma that we discuss every time now, but if we should be buying back our shares strongly, we know that our shares are for free. But on the other hand, all companies have a limited balance sheet. If we do everything at the same time accelerate Sensia, Luggo, AHS and have a buyback program that is too aggressive, we can get to a leverage level that is quite uncomfortable. So we are very impressed.

You have 2 options to allocate capital. One, invest in the subsidiaries; the other. invest in the buyback. We believe we are going to continue to invest in subsidiaries. Believing that our shares will recover sometime soon. And if we don't invest in AHS, Luggo now, we lose 2 years. So we prefer to be a bit more tolerant with this ridiculous price. I think that's the word that describes it, knowing that the devaluation cycle is very short, but the real estate cycle is very long. So we thought that that was not an opportunity for us to lose. But that's the idea. It's really that we believe that things are going to get better in the future.

[Operator]

Our next question comes from Daniel Gasparete from Credit Suisse.

[Daniel Gasparete, analyst]

I'm sorry I have one more question, just to use this opportunity. You talked about pressure on cost a lot. And I would like to know if you have already started talking to the government to review parameters on the Casa Verde e Amarela. Do you have any movement from the government towards this?

[Eduardo de Souza, executive]

Gasparete, this is Fischer speaking. Yes, that happens via [indiscernible] our association, but negotiations are on the table. It seems that the government is also looking into some initiatives in a positive mode. And why? Because if you increase prices, then you have a market that has a cap, you have a problem. The market is going to be smaller. You're going to have less players able to reach a cap. So this is an ongoing discussion. Of course, things take time when you're talking about government discussions, but we do believe something is going to happen in the coming months.

[Operator]

We are now closing our Q&A session. For the final remarks, I'm going to turn the call to Eduardo Fischer, the company's President. Please, Mr. Fischer, you may go on.

[Eduardo de Souza, executive]

Well, first of all, I'd like to thank you. It's always good to exchange ideas and explain our views on the company and the market. I would like to highlight 2 important points. First, what we see in MRV results is fruit of a strategic decision that we made in recent years to go into the market, to create the Luggo operation, to create Urba that are generating fruit now, but they cannot be disconsidered or mismatch to the company's decision. MRV Co is a set of companies from starting that are generating good results as in the case of AHS and will generate even more. Brazil's operation is having a pressure on margins, but the other several initiatives that we created that our building bodies will be more and more representative in our strategies, results and the fruit of our strategy that we've set out in the past and are executing now.

So we are going through a period that all companies are having a compression on their margins. This is happening. If it hasn't happened yet, it will. And even in this scenario, we have other alternatives inside MRV that can not only offset, but also create more value as in the case of AHS and/or but this quarter. So that's very important. When you look at MRV, you have to see it all. Rafael mentioned that we're ridiculous. Sometimes things are treated as one-off. And we are seeing a beginning of recurrence, contribution from these other subsidiaries. And this is just the beginning. This is going to be part of our portfolio, bringing profitability and expanding our platform. So that is a very important point for us.

And the other thing that we mentioned in this call is that it's very clear to me that we are going to have what we call a market down times, especially for MRV, and I think we can benefit the most about in this. There are several markets in which we operate that are smaller. Markets can continue the same sign or grow, but they are going to have much lesser players, which can be very good for us already in the midterm. So the downsizing of market players is very interesting. It's ready calculated in the new price metrics, and that will help us with prices and market share. So these are the 2 points that I would like to leave with you. Thank you very much and we'll talk next quarter. Have a good day.

[Operator]

MRV's conference call is now closed. We thank you very much for joining us and wish you a good day.