MRV Engenharia e Participacoes SA

BOVESPA:MRVE3

Earnings Call Analysis

MRV Positive on Turnaround and Growth Plan

After challenging quarters, MRV announces a quarter with positive net operating income and a near-neutral cash burn, signaling a turnaround. Sales reached BRL 2.2 billion, and gross margins on new sales improved above 32%, with a projection to deliver at least 33%. MRV Day’s KPIs are expected to be surpassed, although neutral or positive cash generation may not be achieved until the fourth quarter. The company reveals confidence in the 40-35-15 in-house project: aiming for 40,000 net sales, 35% gross margin, and 15% net income. By reaching these targets, MRV aspires to deliver its best historical results soon.

A Turnaround in Progress

MRV's third quarter earnings call of 2023 detailed a backdrop of transformative achievements. CEO Rafael Menin started on an optimistic note regarding the Brazilian operations, noting a successful follow-on and the company's first quarter of net operating income post-exclusion of swaps effects. The progress was emphasized with a near neutral cash burn, improved sales strategies, and a gross margin on new sales that exceeded initial projections, promising a minimum of 33%. Menin highlighted a significant recovery path, expressing confidence in the company's trajectory towards becoming a robust cash generator in the medium term.

High Hopes for Resia in the US Market

The enthusiasm extended to Resia, MRV's US operations, due to its potential in promising US cities like Miami, Atlanta, Houston, and Dallas. Despite the current high-interest rates in the U.S., MRV anticipates a decline which, paired with Resia's competitive product, is hoped to elevate the company's standing. A 'golden rule' was revealed: by the following year, Resia's size will be determined not by cash burn but potentially by some cash generation.

Financial Performance and Future Prospects

CFO Ricardo Paixão provided insights into the financials, underlining a record level of net revenue of BRL 1.9 billion and a gross margin increase to 23.4%. The company's price increase above inflation also enhanced the gross margin for new sales, which stands at 32.5%. Paixão forecasted a steady improvement for the RAF margin, expected to stay around 5-6 percentage points above the accounting future margin. Land deals, including an underperforming Curiti land sale, were recognized as accounting adjustments necessary for maintaining the strategic health of the portfolio.

Challenges and Strategic Adjustments

Rafael Menin acknowledged the challenge faced in aligning net income with cash generation, stating the portfolio should at most move sideways. He elaborated on efforts to lower the pro soluto levels and suggested a potential for a reduced spread in the future. However, the company pursued a strategy to adjust sales of units and remain competitive, noting the importance of partnership with banks and entities to reduce selling portfolios next year.

Regulatory Landscape and Market Dynamics

Menin also touched on regulatory matters, including guarantee laws and the potential impact on MRV's pro soluto. Furthermore, he discussed the Sao Paulo market dynamics, stating that initiatives like the launching of 7 Suns and a strategic focus on 100 municipalities would contribute to more efficient operations, a better market position in Sao Paulo, and other key Brazilian metropolitan areas.

MRV's Optimistic Outlook for 2024

Concluding the call, Menin reiterated a strong positive outlook for MRV, expecting the upward trend to continue into the fourth quarter and beyond into 2024. The discussion shed light on the discipline and confidence within MRV’s team, reflecting a sentiment that regardless of external factors, particularly in the U.S market, both Brazilian and U.S operations were anticipated to deliver robust financial and operational results.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good morning, and thank you for holding, and welcome to MRV's Third Quarter of 2023 Results Conference Call. Today with us, we have the CEO of the company, Mr. Rafael Menin; and the Chief Financial and IR Officer, Mr. Ricardo Paixao. [Operator Instructions].Now I would like to turn the floor over to the CEO, Mr. Rafael Menin. Mr. Menin, you may continue.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Good morning, everyone. Thank you again for being with us in the earnings conference call for the third quarter of 2023. First, I'll start speaking by MRV development Brazil. It has been a quarter with high achievements of the company. In July, we did a follow-on with a very right timing, very successful, a good pricing and the new base of new shareholders that have continued and have betted on our project and have supported a project. So after some quarters, this is the first quarter with the net operating income, actually speaking. If we exclude the effects of swaps, we have delivered a net income still much lower than we can deliver. But the reversal of the result makes us sure that we are on the right track and doing the right thing.It's also important to highlight that after many quarters with the cash generation that was negative and some quarters with a very negative cash generation. In this quarter, we are closer to neutral cash burn. And this path also makes us confident that soon, the company will be generating cash again. And in the medium term, we will certainly be a strong cash generator. It's also important to highlight that we have -- as we did in the first quarter or rather in the second quarter, this third quarter has strong sales. We sold BRL 2.2 billion and because of the right products, the right pricing strategy, locations and cities with a good sales force. And so our path of recovery of prices and volume has been successful.The accounting gross margin has also been recovered for last 4 or 5 quarters, better and better. And this is nothing more than the conversions of the accounting gross margin or the gross margin of new sales. And this trend will continue to repeat in the next quarters. As I said, the gross margin for new sales has also improved. Of course, at a smaller level, we reached above 32% for the gross margin of new sales. And now, we are absolutely certain that we will deliver at least 33%, which was the figure we said at MRV Day in the beginning of the year.Now speaking of MRV Day, we will exceed the main indicators or KPIs that we presented, net revenue and gross margin of new sales were likely to be above. Maybe we won't reach a neutral cash generation or positive generation because in the first 2 quarters, we were a bit lower than expected, but we expect to have a fourth quarter much better than the others. And therefore, we get closer to this KPI. That is the most important for the company to that is to again start generating cash. So this turnaround was made in a short period of time. If we look at the figures of the company 1 year ago and today's figures, we are, in fact, at a completely different level, and the trend continues to be for a continuous trend. This is the result of a lot of work and a lot of discipline, and I would like to thank our team that has been working as hard as ever, strongly dedicated and the results are here.We are very focused, very optimistic, and soon MRV real estate development will be operating at a level, it will be alone at an operating class in terms of size and profitability and cash generation. And we were very vocal in the follow-on about our in-house project that's called 40-35-15, which is basically to have 40,000 net sales per year with a margin of 35% gross margin and a net income of 15%. And cash generation at the same pace of the company's income. So by reaching those figures, MRV real estate development will deliver the best results of its history. I think we're not very far from that actually, although our cycle has been a bit long. When looking at operational figures, we can see how close we are to this plan, and that soon financial and accounting indicators will converge soon for this beautiful plan that we presented.Speaking of Resia, we are very certain that is the market niche that we chose, the cities we operate, Miami, Atlanta, Houston, Dallas, are the markets and market niches that are most promising one in the U.S. market. And the U.S. is by far the largest economy worldwide. And only in these 3 states we operate in, -- they have a GDP of $3.5 trillion, maybe the fifth largest economy worldwide, just counting 3 states. So we are operating in a gigantic market for -- with the right product for the right income level.Resia is a very standardized product. What we do in these 3 states is exactly the same. So it's the most industrial company among those that compete in this market, so much so that the fundamentals of Resia are the right ones so that in a scenario of lower interest rates, this company can shine in the U.S. market. We remain very sure of Resia thesis. And we believe that currently, we are experiencing a very unique moment in terms of income, rather, interest rates. We never expected interest rates in the U.S. to be so high. I mean it was -- 1 year ago, it was 0, close to 0 and the inflation that started with COVID spread and reached 10% in developed economies, and then interest rates had to increase a lot. But since then, we've seen many inflation indicators going down. So inflation is decreasing a bit slower but at a low speed, but it's a consensus from the market that inflation will decrease even more, and then interest rates will drop.So, in a scenario of the -- with the right interest rates and Resia being a very competitive product, we are absolutely sure that it will be a spectacular company and growing at a level much better than now. Because now it is growing at a low pace, but Resia will be a great company very soon. And we have announced in our earnings release, this golden rule that Resia, by next year, the size of it will be defined not by noncash burn and if possible, some cash generation.This is it now. I turn the floor over to Ricardo.

[Ricardo Paixão, executive]

Thank you, Rafa, and good morning, everyone. I would like to start by going over some figures of the Brazilian real estate development operation regarding the turnaround process. Let's start talking about the net presales for the quarter reached BRL 2.2 billion for MRV, totaling BRL 6.2 billion in the first 9 months of the year. This is the highest volume of net sales in the company's history for the first 9 months of the year, benefiting from the improved conditions offered by Minha Casa Minha Vida housing program. In the third quarter, we also reported a production increase of 15% growth in production when compared to the second quarter '23 or 5% compared to the same period in the previous year.Now speaking about financial indicators, these operational recovery has been reflected in the company's financial results in each quarter, reaffirming the successful turnaround process. Financial indicators are in line. And at some point in time, they will reach the operational indicators. Net revenues reached a record level, combined with strong production in the quarter. And with that, MRV recorded the highest net revenue in its history in the third quarter of '23, reaching BRL 1.9 billion in net operating revenue, which is equivalent to an increase of almost 9% compared to the second quarter of '23 and almost 18% compared to the same period of last year. The gross margin is improving quarter-on-quarter, now reaching 23.4% after interest. And this is the fourth consecutive quarter of improvement in this indicator, accumulating 4.5 percentage points since the third quarter of '22, 1 year ago.We have also managed to increase our prices above inflation. So the gross margin for new sales continues to increase -- it has increased again this quarter, reaching 32.5%, 8.8 percentage points higher than what we reported in the second quarter of '23. Adjusted net income in the 9 months was BRL 102 million with a positive variation of BRL 175 million compared to 9 months of '22. Cash generation continues at MRV with to reduce operational cash burn, reaching BRL 46 million approaching breakeven. The ongoing improvement in gross margin supported a proper product pricing above inflation and strict cost control, we reflected an increase in cash generation in each quarter.Now talking more about the U.S. operation, it's always important to say that there is a significant demand for workforce housing in the Southern states of the U.S. So sometimes we see some news and studies regarding multifamily market, but we have to pay close attention in the location that we see these studies being made of and what class because the results are very important. When we talk about low-income families workforce, which is the one we operate for and higher income levels. So since there's a high demand for units offered by Resia, that has ensured excellent leasing speed and high rental prices, providing a healthy yield on cost for the development and construction.Despite seeing this multifamily opportunity is highly attractive, as we see it, we are mindful of the Fed's efforts to bring inflation back to its targets. So the rise in Fed funds rates, coupled with economic uncertainties has resulted in higher cap rates as well as reduced credit availability for those who are purchasing this type of asset here. So in this period of extreme volatility in financial markets, we are opting for a temporary strategy to stabilize Resia's operations, as said, respecting our golden rule. I reaffirm that all of the developments currently under construction have the totality of funding needed to its completion secured in the form of construction loans or through limited partners. Additionally, we will continue with our strategy already adopted for several quarters, have only begin new constructions when the projects have all the necessary funding secured through firm commitments, either construction loans or limited partners.Now we can move on to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Ygor Altero from XP.

[Ygor Altero, analyst]

I have 2 questions. First, on the 0 cash generation at Resia, what is the scenario that would need to happen? And what's the cap level that you intend to sell this project?

[Ricardo Paixão, executive]

Well, Ygor, this is Ricardo speaking. Zero cash generation. We still have 3 construction projects ongoing to be finalized, and they will use $113 million up to their completion. Some of them will be ready in the beginning of the first quarter and others in the third -- the second quarter. So those assets are [ basin areas ] that will sell all assets, but the golden rule is that we have to sell at least at 113 to offset the disbursement in the construction financing for next year. If we sell more, then we can start other construction projects.We have 3 projects to start that will only happen according to that rule. So what will dictate that is the level of sales level of the properties. So that would be BRL 400 million. If it was [ 1.8 or 6 or 6.10 ], that BRL 480 million can be a different figure.

[Ygor Altero, analyst]

Okay. The second point is just to understand what you expect in terms of launches. Last year, you accelerated in the fourth quarter. Now we understood how you're doing for fourth quarter and next year because the new parameters of the program are different. The program is growing. So that's -- I would like to understand what are your prospects.

[Ricardo Paixão, executive]

Since we changed the way we disclosed, we're disclosing by module and not by property. So according to the former criteria more than 40,000 units -- last year, we launched more than we sold. Now we're launching less than we will sell. Launches are not a bottleneck for us. We have lots of products to launch. So we're just waiting for the ideal moment to launch them.For next year, it should be close to 40,000 units -- 37,000 to 43,000 that will be similar to the sale of 40,000 we have for the year. Since we have this new criteria, they converge at some point in time. So today, we disclosed a smaller number that we have are actually available to sell. In the past, we did the opposite. We put all the projects to sell, and there was only some modules that were being sold actually.

[Operator]

Next question comes from Bruno Mendonca from Bradesco BBI.

[Bruno Mendonca, analyst]

My question is about the earnings. About the RAF margin, we've seen a clear development in the indicator of margin from new sales, close to 32% versus reported around 23%, but the RAF margin at 38%. I would like to understand again what should be the behavior of this gap between margin RAF and margin of new sales I have a feeling that this gap is higher than it has been in the past. Maybe it has something to do with the provisions for pro-soluto. Is that -- what happens? I mean, does it have an impact? And how should that develop or behave in the future?And the second question is about the loss of BRL 20 million that you had in sales of plots of land in the quarter on the third, is it an accounting adjustment? Or did you actually sell land?

[Ricardo Paixão, executive]

Okay, Bruno. Regarding the RAF margin, what we should see is that RAF margin being more in line along with the margin of new sales. The RAF margin should be higher than the margin of new sales because after that, we have to deduct provisions for maintenance, financial costs, there a series of items that we have to deduct to really see the accounting gross margin.When we say gross margin of new sales, that's the future accounting gross margin that we will see. So RAF at 38, would still generate a gross margin that's lower than the gross margin of new sales, that's due to a mix of seasons. We still see a greater weight of previous seasons than we have now in the margin of new sales. So in the future, we will see RAF at 5 or 6 percentage points above the accounting future margin.And as for land, this is a land we bought in [ Curiti ], but we had paid for it already. And there was a change in the zoning criteria. So it no longer makes sense for us to develop and construct there. The feasibility was bad, it was poor. So we did sell that land. We'll receive the payment during the fourth quarter of this year. The financial transaction didn't take place, but we already made the provision because we know that we'll sell for less than we had recorded in our books.

[Bruno Mendonca, analyst]

Let me just clarify on the RAF margin, please. So you're saying you're having new sales inside with a margin at 32%. Wouldn't that improve the RAF margin more and more?

[Ricardo Paixão, executive]

Yes.

[Bruno Mendonca, analyst]

And the question is if this gap of 6 points is something we should consider reasonable to work on stability, let's say, 1 or 2 years towards -- in the future. Should the gap stay around that level?

[Ricardo Paixão, executive]

Well, actually, Bruno, the gap varies a bit. Today is around 6%. It could be a bit up or down, especially depending on capitalized interest rates and interest of construction funding. So as the RAF margin, as the quarters go on and we include new sales with higher accounting gross margins. This is what creates the development of the RAF margin.

[Bruno Mendonca, analyst]

So I would say for the next 2 years, it would be 32% on a nonconstant level.

[Ricardo Paixão, executive]

Yes, that's converging with the new sales margin of 32.5% that we reported now.

[Operator]

The next question comes from Victor Tapia from UBS.

[Victor Tapia Migliorin, analyst]

I would like to talk more about cash generation. You said 40-35-15, that getting close to a cash generation closer to income, net income. Today, what still has to be done to reach that point? I imagine that MRV at the real estate development in Brazil has some construction projects that still have a negative margin. And pro-soluto still hasn't reached the ideal level. And I believe that with the new rules of the program, you try to decrease that. If I'm right or if not, let me know when? What is the time, the period for these works -- construction works to be digested? And having pro-soluto an ideal level with a cash generation closer to net income?

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael speaking. Basically, what's the -- what are the differences between generation and net income currently. In fact, pro-soluto is a cause of difficulties because we went from a pro-soluto of 15% in the beginning of '22, we reached 20%, and now are at 17%. So our goal is to reach 12% to 13%. This is a pro-soluto level that causes what to have the same size from what we receive from customers. So, at a salable pro-soluto that causes the net income and cash generation to be very close.Also, the distribution of land. Between 2014 and 2019, the company was very active in buying land. On average, we bought 70,000 units per year during 4 or 5 years. And in 2022-2023, we're paying for the land that we purchased many years ago. So today, we disburse more with the payment for land than we should for a company of 40,000 units.On the other hand, in the year 2022 and '23, we purchased much less land than a 40,000 unit operation per year would demand. So we are using up this inventory of land that was generated in the previous cycle. So, as we start to have an adequate disbursement for land, adequate to 40,000 units per year operation and a direct credit or pro-soluto granting at the right level of 13%, that would both be [ Paribas ]. That would happen probably within a year. So, 40,000 net sales per year with an average price that's close to BRL 240,000. Next year, prices will go up a bit higher than inflation. So we expect to reach an average price slightly above BRL 250,000, which would lead the company, obviously not in 2024, because there is a time delay to -- for the constructions, but we're talking about net operating revenue potential of EUR 10 million per year with a net income of 35% and cash generation around 15% of net operating income.So by reaching these indicators, the company will have reached the best cash generation, financial and operating results of its history. This is the goal we pursue. And the management team of the company has worked very hard with a lot of discipline to reach this operational, financial level.

[Victor Tapia Migliorin, analyst]

Okay. That's very clear. Just a follow-up. Why not be more aggressive in the strategy to reduce this pro-soluto or direct credit granting? Now that the program has more rules with more purchasing power for end users, is there any other reason for this reduction to be so gradual and not more aggressive?

[Rafael Nazareth Menin Teixeira de Souza, executive]

Well, Victor, we have to balance several indicators. One of them is priced another important one is volume. And the pro-soluto is also an important indicator. So we have tried to balance these 3 indicators according to what we believe is adequate with the greatest competence possible. And another important point is that the product is evaluated by Caixa, the Bank. And Caixa takes some time to bring the evaluation of the product according to the market reality. So, you are right, the new program rules have helped. There's a last announcement we believe will happen this year maybe. It is to use future FGTS funds to increase the funding capacity of customers. So having considering all of that with the future FGTS and the valuations of Caixa at the market levels, we'll be able to reach a pro-soluto of 12% or 13%, which is the ideal level to have the metric of credit granting, and receive the amounts received Paribas, is it clear?

[Victor Tapia Migliorin, analyst]

Yes, it is.

[Operator]

The next question comes from Andre Dibe from Itau BBA

[André Dibe, analyst]

I have 2 questions. First, regarding the portfolio. If you could give us some more color about the behavior of the portfolio, default and other conditions, are they still healthy? And also about portfolio, you've mentioned the reduction in the direct credit granting or pro-soluto. I would like to understand if this reduction could compromise your strategy to sell trade receivables?And the second question, just to resume a topic from the beginning of the year, that is [ Pode Entrar ]. What is your expectation for contracts in that area? There were some problems in implementation. So could you give us an update on that?

[Ricardo Paixão, executive]

Okay, Andre. Starting with the pro-soluto portfolio. We have seen the default rate that is very much under control for this portfolio. All the America analysis, statistical modeling analysis for loan credit, housing credit, it's been very robust. So no surprise on that side. All indicators shows that our provisions are pretty much on track, and we don't see this going up when compared to what we have in the past and the provisions. For, I -- we granted 21% of the property value, and we were able to lower that. At the end of the quarter, it was 17%.And as Rafael said, we have to balance several variables. So to have a reduction in the portfolio is important, but continue to raise volume at the margin and new sales is also essential.

[André Dibe, analyst]

So could we have room to reduce that even further?

[Ricardo Paixão, executive]

Yes, the future use of FGTS future funds is one way to do that. It is lower because the subsidy is higher. And so, we start with FGTS in the future, we'll be able to migrate our volume that's currently at 35%, 37% within Level 1, we may get up to 42% to 45%, depending on the future FGTS use. That would also have in the reduction of granting our portfolio with the lower pro-soluto.Not considering the 1% rate that will help in the profitability of these sales. Now talking about Pode Entrar, the schedule is a bit delayed from what we expected, but there are some projects with the development records ready. We are still very excited about the program. We intend to keep all the volume we allocated for the program to make it work, to have the contracts and be able to deliver the units for the City Hall, Sao Paulo. So on our side, there's no change. We continue with the same plan. As for a discussion of guarantees, the company wants to use the program, but to have a mitigated risk, which is.

[André Dibe, analyst]

How we intend to sign the contracts? We intend to have a signed contract until the end of this year for some projects?

[Ricardo Paixão, executive]

I don't know what is the guarantee exactly. That is the current discussion.

[Operator]

The next question comes from Gustavo Cambauva from BTG Pactual.

[Gustavo Cambauva, analyst]

I'd like to ask, it's more of a reflection on cash generation in the operation of Brazil, because looking at what you had presented in an MRV Day, you probably will deliver on all the guidance in terms of leverage, revenue, margins, only cash generation that will be lower. But when you look back on what you had projected in the actual cash generation, what were the 1 or 2 reasons that caused it to be so much lower than you expected -- what you expected for the year?I'd like to understand if maybe it was caused in order to finish the works quicker, you ended up disbursing more than you thought? Or maybe cash incoming funds were lower than expected? Prices? Because I would like to understand, because when we look at the dynamics of the program, everything improved. The prices went up, transfers are good, sales are good. So I would like to understand from your point of view, what was different from expected. What's the missing element there?And as a follow-up from this first question is thinking about 2024, as a consequence of the cash being worse in 2023, should we expect that this would be pushed to 2024? So maybe it would make sense to think that your projection is conservative for 2024? Or if this cash was really lost, because during 2023, you had disbursements with construction works or land that was not accounted for and then cash was lower. And in 2024, it will continue as is.

[Ricardo Paixão, executive]

Thank you. It's great talking to you. Okay. Let's answer, cash generation 2023. We are at BRL 300 million behind the guidance, considering the lower end of the guidance. In the fourth quarter, we will be certainly better than the third quarter. I find it very difficult to reach the lower level of the guidance, the minimum. There are 2 factors that gotten the way regarding what we envisaged in the beginning of the year. First was land. We will spend BRL 100 million more with land. We had adopted an assumption of postponing some payments. We were able to deliver on part of them. Another part we did not. So there was an impact of land and BRL 100 million.And also, our performance was very good in launches. We launched several products in the first and second quarters that sold very well. And the recognition of revenue and the amounts received happens at a lower amount than a product that has a PSV that's higher. So the 2 metrics, we didn't get right this year, we got many things right -- many more things right than wrong, but the average book of sale is lower than what we had assumed and the disbursement with land. We were not able to reach the goals we had established at the beginning of the year. As for 2024, we'll have MRV Day soon to rebalance or recalibrate the expectations for 2025 -- '24, '25, '26. And -- but we are sure what is there will be delivered. We'll have MRV Day in January and with the KPIs for '24, '25 and '26, and we work to deliver at least the minimum levels of all the KPIs that we'll present to you soon. Okay. Is it clear?

[Gustavo Cambauva, analyst]

Yes, very much. The sale of -- so you sold more recent inventory levels.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Yes.

[Operator]

The next question comes from Fanny Oreng from Santander.

[Fanny Oreng Avino, analyst]

My questions are more towards Resia. You were saying that if you sell the projects, you would have another 3 projects to be developed next year. How do you see the availability of banks regarding LTV, I've heard 65% LTV in construction banks are more cautious regarding that. So I would like to understand what level of bank funding rates you expect for Asia? And the second question is on funding for Resia. How do you see the funding that less making to invest in Resia's project.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Thank you, Fanny. First, regarding funding, we observed its loan to cost. It's not LTV with LTC, right?

[Fanny Oreng Avino, analyst]

Yes.

[Rafael Nazareth Menin Teixeira de Souza, executive]

So we see that LTC went down a bit. It's usually 65%. Today, it's now 55%, so 10 percentage points up. And therefore, we've been able to have a higher percentage of either a joint venture or preferred equity for limited partners to solve that issue. So the equity that we put is on land plus approvals. So we've been able to obtain that funding to start construction and reinforcing again that construction only starts when all costs to be incurred in the project's capital is obtained either with the construction loans or with partners. So the rates have increased a bit. SOFR, it used to be SOFR plus 2.75. Today SOFR plus 3.25. And what's changed was not the pre, but it's SOFR that went up for 10 years. This is what's going on today, but we've been able to get funds for the construction.In terms of funding, the total plan is to obtain funds for 3 projects, but we are structuring it as independent projects. The funds like you raised funds for the first project. And as the other projects start, we'll make a follow-on and raise more funds. The raising of for the first fund is doing fine. We'll be able to settle that fund shortly. So we obtained other funds for the first project. And in order to start the project, we'll have to -- we have to sell mature projects so that the golden rule that we set for ourselves is respected. Would it be a limited partner? Well, in this case, it would be with my equity. First, my equity with limited partners and then funds from construction loans.

[Fanny Oreng Avino, analyst]

Going back to Brazil, could you say anything about the expectation for the judgment of today?

[Rafael Nazareth Menin Teixeira de Souza, executive]

Everything that I say could be outdated soon. What we see, the judgment as a final resource, especially after the government became so sensitized about this topic and made effort to talk to the Supreme Court judges to try to show the importance of funding and funds and the benefits of that. We've noticed the change in the discourse. So we still believe that something will change in terms of compensation, but they won't impact the funding capacity of the fund either in terms of volume or increase in rates. But exactly the result, I cannot say if it really will be discussed today, if someone will ask to see the process and then we will be judged and decided only later on. I really have no idea.

[Operator]

The next question comes from Aline Caldeira from Bank of America.

[Aline Caldeira, analyst]

I have 2 questions. One is a follow-up. But first, I would like to talk about the portfolio sale. We've been talking about this in every call. But now the company's reduced leverage has made a follow-on. So how we can think about the sales of portfolio for next year? Does it make sense to really lower that pace? And if you do so, do you see a room for reduction of spread in those sales? And that's a follow-up on Ygor's question on the golden rule of Resia. So the idea is not to burn cash. You have disclosed that we'll plan to sell 1,300 to 1,400 units during 2024. So assuming that $300 million to $220 million, what works do you plan to start next year to be within the rule? And what do you need to see in the U.S. to resume the company's growth plan?

[Rafael Nazareth Menin Teixeira de Souza, executive]

First, regarding the sales portfolio. The main challenge in order for us to have a net income aligned with cash generation, the portfolio cannot grow. Our main challenge is to see it moving sideways at the most. Since we're talking about less credit granting last year and the pro soluto dropping as a percentage of sales, we can think about a lower sales of portfolio next year. In terms of spread, if we need to sell less, we're able to be more competitive among those who buy and there's an opportunity to reduce spread, especially if interest rates drop. Those who purchase are recurring buyers, they can see the risk very well. So that's becoming more and more mature even for a possible reduction in spread.As for the second question, golden rule, we have almost 400 in the portfolio able to sell, 113 to close, and the plan is to start 3 more construction projects. If we finish with 113 and only start 3, we can still have -- we can begin to have cash generation in Resia. And what needs to happen to resume that it's much more of a structural answer would be a specific set of variables with the lower interest rates in which we're able to operate and sell at better margins, that would make us comfortable to start talking about growth at Resia again.

[Operator]

The next question comes from Hugo Grassi from Citibank or Citi.

[Hugo Grassi B. Soares, analyst]

Congratulations on your results. I would like to hear from you about the new managers of Caixa Economica and now the head is Carlos Antonio Vieira that took office yesterday. So in terms of visibility, what do expect from this first line of VPs? I know it's hard to see what -- if anything else is going to change. But could you give us an idea about the continuity of operations in Caixa, at least with the technical staff? So actually, the question is, what is that issue? Caixa's appetite, Caixa was signaling a rollout for consigned credit. I would like to understand if Caixa under new management would have any influence on the operational side that has to do with the customers' affordability?The second question involving a bit of future thinking the technology landmark that was the past last week and was sanctioned by the President, allows people to have one more credit line that uses the same property as collateral, which makes this dream of having maybe pro soluto that could also be collateral. Is it reasonable to expect that? Can we believe in that? Who has the veto power? Maybe Caixa does that? So these are the 2 questions.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Okay, Hugo. This is Rafael speaking. As for -- regarding Caixa, what we see in this many years that Caixa is -- it's a very protected institution. And naturally the new CEO that has been chosen is aligned with the main purposes and main goals of this current administration. We know that the current administration is very positive about the program, especially for lower income people. So regarding affordability, 420 future FGTS funds, we don't believe that new management will completely change the purpose of causing the building 2 million new homes during this administration.But what we see today is that there is a positive discussion among private companies, Abrainc, [ CaixaBank ] barges from guarantee fund with Caixa, the new CEO, is someone that Abrainc has known for a long time. He's very competent. So we're very confident that this dynamic of support to cause the sector to build 12 million houses in the next 4 or 5 years remains. So maybe this is the government program that's easier to be executed since it doesn't require any public funds almost. So the issue is to provide the rules so that the market can build this 2 million housing units very well. And the government is really making a strong effort to do so.I'll let Kaka give you more detail on the other question.

[Ricardo Paixão, executive]

Okay, Hugo. Regarding the guarantee law, I believe that is resistant by Caixa should not exist because it's very clear that the first guarantee, the main one would be from Caixa, and we or the pro soluto or those who use the same property as a guarantee would be subordinated to that one. So I wouldn't see why would Caixa would not agree with that. Having pro soluto recorded in the deed of the purchase and sale of the property would be very helpful at the time of sale, but there is still some things to be discussed towards the future to see how it would apply to our pro soluto. So these conversations about pro soluto are happening according to this new law. Specifically about pro soluto, no, I think this is a further step.

[Hugo Grassi B. Soares, analyst]

If you allow me a third question, a very brief one. Just to give you an opportunity to comment more on the mega project of Sao Paulo City, I see a huge exposure to the market of [indiscernible] in Sao Paulo. What do you feel about the depth of such demand? What do you think would be the launch pace in demand?

[Rafael Nazareth Menin Teixeira de Souza, executive]

This is Rafael speaking. 7 Suns or such as size is a project that has an excellent location. It's a differentiated master plan. It's a planned neighborhood with close to public transportation, roads. We created 3 types of products with different prices. All the products fall under Minha Casa, Minha Vida housing program. And we know that there is a huge demand for housing in Sao Paulo. So products that are well located with good access to public transportation, with the right pricing will be well accepted by the market.We made a very important effort. It's a nice launch. The local sales force is mobilized. We believe it will be a very successful project, profitable one. It has several phases. The payment for land is also linked to the development of the project. So it was very well created and conceived when all its indicators -- so we are certain that we have a higher market share in the Sao Paulo City. And this converges with the plan that we announced more than 1 year ago of being present in the metropolitan areas of Sao Paulo of Brazil and leave some -- gradually leave some smaller markets.Today, we're focused on 100 towns. And as we grow the market share in these markets with the recurrent launches will have a slightly cheaper operation and more efficient one. So everything that we planned for, we've been able to execute and deliver in 7 Suns such as size is part of our strategy to become more relevant in the Sao Paulo market as well as in other important metropolitan areas of Brazil. Is it clear?

[Hugo Grassi B. Soares, analyst]

Yes, very clear.

[Operator]

Next question from Jorel Guilloty from Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

I have 2 questions focused on Resia. I would like to have a follow-up on Fanny's question. You talked about construction loans. It's pretty much the same questions. What loan-to-value cost do you envisage for permanent loans? Is it more significant for Resia right now? You have published the MAV of Resia, and I was curious to understand the change in the holding value because in the second quarter '23, BRL 148,000 for the holding and now it's $20 million. So I would like to understand this change in quarter-on-quarter.

[Ricardo Paixão, executive]

This is Ricardo speaking. First, regarding permanent loan. We observed that it's still available. Fannie Mae, Fred Mac through the agencies. And the cost has increased a bit along with 10 years, but the permanent loan impacts on Resia on the purchaser side, those who purchase our properties have to fund in order to buy. We have not had made this type of debt. We prefer to recycle the assets because after construction is finished, we have 2 years to pay the debt. So permanent lower has a bit lower cost than construction loan that we get, but the exit penalty is high if I prepay that debt. And in a scenario that we want to recycle, it doesn't make sense to be in a permanent loan to stay in it for less time.The second point, the reduction of NAV of Resia was due to a cap. We had assumed a lower cap, and we adjusted the exit cap, and that caused the overall figure to go down. And the NAV from the holding company, we sold at the end of the second quarter and in the --- throughout this third quarter, it became investment. It was spent -- it migrated from holding to projects.

[Operator]

Next question from Marcelo Motta from JPMorgan.

[Marcelo Motta, analyst]

I have 2 questions. FGTS for next year, everybody sees BRL 75 billion. I know that's not ideal. So I'd like to understand what you think the budget should be from the ideal point of view for the growth of the entire industry? There should be more competition. And how do you see the competition? Because now my house, my life market is more attractive. There are more people coming. So what do you see in terms of competition?

[Rafael Nazareth Menin Teixeira de Souza, executive]

Motta, this is Rafael speaking. Great talking to you again. Well, regarding funding from FGTS, this year was way higher than from the first budget. It's at EUR 90-some billion. And we expect that next year, that amount increases so that the program will remain at the same size. What's being discussed in a very sophisticated way with a high partnership between [indiscernible] fund, Caixa on the government, how can we have a framework that allows us to build 400,000 housing units per year, but looking at its long-term sustainability. So what's being discussed is what tools could we use or parameters should we change in order to have a good program that would be perennial.Recently, for example, Caixa changed the rule regarding used units. The LTV for used properties was raised to 70%. And in December, we'll go back to 50% because the growth in used units in the market share of the market was very high. So it was understood that in order to generate jobs and new construction, the used units should have a lower share. The ceiling of the program is now 350,000. Would that be discussed? Maybe. I think the priority of the government will always be lower income breakers and making 400,000 housing units per year. So this is the idea to interact, to discuss things with other people to have an adequate program that could also last. And the government is very sensitive to that agenda. So we are confident that in 2023 as well as in '25 and '26, we'll have a program that will remain at the level of 400,000 units per year without compromising the guarantee fund.As for competition, that was your second question. If we look at the market as a whole, the volume of launches, volume of units built, I'd say that the market is moving sideways in some cities, it is more active, such as Sao Paulo. In terms of its population, in relation to its population, Sao Paulo is the most active market in Brazil. But when we go to the interior of Sao Paulo, Midwest and Northeast competition is lower than it used to be, and we don't see any sign of new launches, it takes time. One has to buy land, get other permits in order to launch. So I'd say that competition is stable. Some markets are more competitive and other markets are less competitive than what we have seen in recent years.And the fact that MRV is the only domestic company or a national company that operates in these 100 cities gives us capacity to launch more in the markets that have more demand and being more conservative in the markets that are with higher competition. Although Sao Paulo, that it's highly competitive, we'd see a very, say, healthy speed sales supply -- sales speed.

[Operator]

The next question comes from Rafael Rehder from Safra.

[Rafael Rehder, analyst]

I'd like to have a follow-up on the average ticket. You said it's 240,000, maybe reaching 250,000 next year. In the projection, do you expect any change in the program? And assuming that FGTS for the future will be implemented and approved, how much do you believe the prices could increase, maybe 250,000 could go even further?

[Rafael Nazareth Menin Teixeira de Souza, executive]

How are you Rafael. It's great talking to you. Regarding price/margin, we have reached a very good level, a level that's close to or even higher to the pre-COVID one. We believe that we have plans to grow even more. Our plan is 40, 35, 15 with a gross margin of 15%, which we believe is good to pay for capital, given that our business is cyclical and has some inherent risks. But you mentioned the future FGTS and some state programs that have been executed. And we've seen more and more state governments announcing programs to provide extra subsidies. There are 3 or 4 states already doing that. But there are at least 6 states that are preparing or about to start days, each one has a different name.Some states give extra 10,000, 15,000, others give 30,000 extra funds for housing. So our decision is much more related to pro soluto and less on price increases. Increasing prices marginally above inflation, but it's more concentrated on Group 1. In some levels, the limitation is Group 2. Group 2 is smaller check. And for pro soluto in the future should be on Group 1. So we'll use this tool of FGTS, I'm sorry, FGTS and also this check to reach a pro soluto of 12%, 13%. This is our main goal. And we know that having a very large portfolio is not very nice. It's not the ideal, but it's part of our business. And at reaching pro soluto of 12%, 13%, we reached a breakeven. And all of that will allow the cash generation to be pari passu with the net income of the company.

[Operator]

This ends the Q&A session. For the final remarks, I would like to turn the floor over to Rafael Menin.

[Rafael Nazareth Menin Teixeira de Souza, executive]

Well, fine. First, I would like to thank you all for your presence. We had a call with a large number of questions, many good questions. I hope that both Kaka and myself have been able to answer your questions. And I would like to say that we are very optimistic and happy to have turned around our operating results and the financial now reaching our goals very soon. And I think that the company is on the right track, and we believe -- we hope the fourth quarter is better than the third one. And that 2024 will continue to deliver operational and financial results that are positive. We are very sure about our plan, very disciplined and positive that MRV soon will deliver results that are in line with the company's history. But with higher revenue, net revenue, and we'll have the best indicators in the company's history.As for the U.S. operation, we're also very positive about the choice we made in terms of type of product and market, knowing that currently, interest rates are very differently from what they have been in the last 20 years. And we're sure that interests will not remain at this high level. It will go down, causing Resia's operations to be very strong for MRV&Co. So our future is well planned. Now we have to deliver what we can do in-house we're doing. And on Resia, we depend on external factors. And as soon as things be improved in the U.S., I believe both operations will deliver high-quality financial and operational indicators.Thank you very much, and we see each other in the next release and earnings conference call. Thank you, and have a good week.

[Operator]

The conference call of MRV has now ended. We thank you all for attending, and have a good day.[Statements in English on this transcript were spoken by an interpreter present on the live call.]