Ladies and gentlemen, good afternoon. Thank you for holding, welcome to MRV's First Quarter of 2023 Results conference call. Today with us, we have the CEOs of the company, Mr. Rafael Menin and Mr. Eduardo Fischer. The Chief Financial Officer and IR Officer, Mr. Ricardo Paixão. We would like to inform that our participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a Q&A session when further instructions will be given. Now I would like to turn the floor over to Mr. Rafael Menin, the CEO. Mr. Menin, you may proceed.
Good afternoon, everyone. Thank you for attending the earnings release conference call once again here with us. After the presentation, we'll have the Q&A session, as we usually do. I'll start the presentation by talking about an event that was very important.
The MRV Day, held in the beginning of this year. At the MRV Day, there was something different from the other days because we released the guidance. That's something we haven't done for a while. A guidance for more than one year. For 2023, 2024, and 2025. In this guidance, we talk about margin, leverage, and income. The guidance was disclosed by us because back then we had, and we continue to be quite confident in the strategy of the company and in the track that operations is following, and on the capacity of MRV team. We released the results of the first quarter. As expected, we delivered slightly above the budget metrics for the main business lines. I'll speak quickly about each of the subsidiaries, and then Kaká will go in detail about the financial indicators of the company.
Talking about MRV Brazil, the real estate development company. The first important event was the price increase that started actually last year. We started at BRL 125,000 and finished the year selling our apartments for BRL 208,000. In the first quarter of 2023, prices continued to increase. This dynamic remains in the second quarter in 2023. Having high prices with little volume is not much. It's a large company with SG&A that is expensive, with a heavy land bank. The company's base on an operation of approximately 40,000 units per year. Last year, as announced, we have suffered with volume given this quick price increase. Recently volume has recovered, so much so that we had record sales in the first quarter of this year, and we continue to see an important recovery of volumes.
If we look at the quarter, January was better than December. February in working days was better than January, and March better than February. The dynamic remained so in April. It was a very good month as well. May has been also a positive month in terms of sales. Our strategy to raise prices and then increase volume will certainly allow us to reach the goals we proposed in MRV Day. Especially cash, we had the first quarter much better than the fourth quarter of last year, and we expect the second quarter to be better than the first one, getting close to the neutral cash generation. In the second half of the year, we expect to start generating cash again. It's worth remembering that for many, many years, MRV had a cash generation that was high and consistent.
We generated BRL 3 billion in cash between 2013 and 2019. Something not achieved by any other company in the industry. It was certainly the most consistent company within the metrics of the IPO cycle. We know that income statement will also recover. We've seen the recovery of gross margin in the first quarter. If costs remain flat and sales prices recover and with increased volume, it's only natural that cash generation improves at quarter after quarter. Of course, this will strengthen our balance sheet. In addition to this homework, so to speak, that we've done in a consistent way, and we remain doing, it is very likely that some adjustment in Minha Casa, Minha Vida, My House, My Life program is made because this program remains with very few adjustments during four years.
In the second half of last year, there was a minor adjustment made and an adjustment in the upper limit, values for the program in January of this year. It was unbalanced regarding income, affordability decreased considerably, and the volume of the program was reduced year after year. The current administration has been concerned about that, so we have interest rates for subsidies, and they will probably adjust the upper limit, and we'll probably have some tailwind in that to help recover the company as well. Today, I speak confidently that the MRV of May 2023 is a better company than before the pandemic in every aspect.
Of course, we would not have liked to go through such important and difficult years as those two years were. We've improved our team, we've made several adjustments, I can surely say that we have a company that's working well and very aware, and it will be an even better company than the company we were before COVID pandemic. Luggo and Urba are subsidiaries that are still small, but that operate in very promising markets. We have changed the pace of these two companies. They will grow at a much lower pace, but they will grow. These businesses that required very little or no new capital from MRV&Co. In the future, I'm sure that these two subsidiaries will also play a significant role for MRV&Co.
Speaking of Resia, which is a subsidiary that is in a much higher figure and figures abroad. When we convert these to our currency, it's a significant operation. It's an operation that is in a gigantic market. In the three states we operate, the GDP added would be $3.4 trillion. That would be twice the Brazilian economy only, and four times the German company, much larger than the economy of England or France too. It's a huge market, Texas, Georgia, and Florida states. We continue to see a very high demand for rental units in these segments we operated. We open for lease at high prices, we continue to lease our units quickly. We're very confident that Resia operation will play a very significant role for MRV&Co.
Started in 2013, small. In the first five year, we built one unit per year, but it's proven to be competitive locally. It's, of course, we see lots of opportunities to improve it even further. We expect to increase our competitive differentiation when compared to the local market. A lot has been done, but there are still very nice things to be implemented at Resia so that we can have a yield on cost which we can control with a good level of control. The yield on cost may be even higher than the yield on cost that we've been presenting in lately. Resia had to adapt itself to the MRV balance sheet needs. We can no longer add capital to Resia, it's a company that will continue to grow, although at a lower pace.
In some years, I don't know the size of it, if it's either 4,000-8,000 units per year, but it will grow. We are, you know, we're building this operation without MRV & Co. that will be maybe bigger or even the size of Brazilian company at a country that has no major concerns within MRV & Co. I'm absolutely sure that it would be a huge differentiation for us to own that. In summary, in Brazil, we're very excited with the outlook of the business. We are following a path so that MRV becomes a benchmark company in the industry. Resia, as I said, is a gigantic market and may cause MRV & Co sometime in this decade be much larger than the largest company that is MRV in Brazil.
We can certainly make it grow even further in a cautious, you know, slow growth, with a healthy balance sheet at a low leverage ratio, which has always been our DNA. If we look at the IPO of 2019, we've had leverage above 30% for very few years. This is our goal that will be attained in the medium run. Now, I'll turn the floor over to Kaká. He will talk about the financial highlights, and then we'll talk about the Q&A. Thank you.
Thank you, Rafa. Good afternoon, everyone. I would like to start talking about the strong performance of net sales of MRV Company. This has grown 21% against the fourth quarter and 20% against the first quarter with a PSV of BRL 1.8 million and marking the best first quarter in the history of the company. The MRV Incorporação, the development company, has a great margin. It confirms the trend of recovery of this important indicator. We maintain a gross margin 22%-24% for the year after interest, which grows, a growing gross margin to close the fourth quarter, between 25% and 26%.
We've seen a new increase in gross margin of new sales in March, reaching 30.5% in March, which is an increase in 1.2 percentage points when compared to December 2022, and 7.5 points when compared to March 2022, in line with plan to reach 33% of gross margin of new sales for the fourth quarter 2023. Cash burn in the first quarter is smaller than the fourth Q of 2022, with BRL 120 burned at MRV Incorporação. We're closer to the breakeven. For the year, we reaffirm our cash expectation to be neutral, at least. Debt covenant. It's a net debt plus things to pay over equity.
The main leverages for reduction were higher withdrawals of credit financing, cancellations of purchase and sale of land, and in some cases, purchase and sale agreements being transformed in purchase options. In addition to the trade receivables sales. There is a new item, which is a tax credit in this quarter. Until 2020, they always had a tax losses in its holding company. There were no prospects of offsetting these losses. As of 2021, due to the increase in operations of Luggo and Resa with sales of properties, the company now has taxable profit that if we consider the existence of a history of offsetting tax losses and the prospect of future profits enough to realize all the accumulated tax losses, the company recorded a tax credit amounting to BRL 188 million in the first quarter of 2023.
Income tax and social contribution expenses and net income were positively impacted by the same amount. It is worth mentioning that at the time of calculating the profit, the taxes will be recognized, resulting in the corresponding impact on the income statement. Considering of the offsetting of tax losses, there is no cash impact, only on the book entries. The Pode Entrar program is also worth mentioning. MRV offered 6,250 units with a PSV of BRL 1.100 in the city of São Paulo housing program. Pode Entrar successfully won the bid in all the units offered. In April 26, the municipality called the winning companies to submit the necessary documentation to sign the contracts, including the properties offered by MRV. We expect to sign the contracts between the third quarter 2023 and the fourth quarter 2023.
According to the advancement of the signatures of contracts, payment will be made in full, and we'll receive that, and 15% of this amount will be immediately available. Now, speaking about of our U.S. operation. I would like to highlight that the rental of units, the high demand of rental properties built by Resia continues. We affirm that with the fast rental pace of the already launched and under stabilization projects, Pine Ridge and Biscayne Drive, which began leasing in first quarter of 2023. Pine Ridge, 288 units, is quite advanced and will be sold in the second quarter of 2023. General and administrative expenses. In the fourth quarter of 2022, Resia went through a process of readjusting its structure with the layoff 25% of its staff.
The impact of this movement have been felt in the first quarter of 23, with a reduction of 58% in this line, totaling BRL 30 million for the quarter. The result was positively impacted with a reversal of $2 million provision. In general, we are in line with the projections prepared for the year, except for our program, which will be an addition to our estimates shared with the market in February of this year. Now let's move on to the Q&A session. Thank you.
We'll now start the Q&A session. If you wish to ask a question, please press the reaction button to raise your hand. If your question has been answered, you can leave the queue by clicking on Put Your Hand Down. First question from Victor.
Good morning, everyone. Can you hear me?
Yes, Victor, we hear you.
Okay, the first thing I would like to ask you, if you could please talk about FGTS and the Supreme Court in Brazil. I mean, it's counterintuitive moment, differently from what the government intended to do. There have been some announcements of the program to be made, it's mostly to understand if you could give us an update on that. Also I would like to understand the strategy of the company in a scenario where we have a somewhat more limited situation regarding FGTS severance fund. Kaká has mentioned about Resia, that there's a prospect for sale of it, we've seen some figures in the U.S., we see that operational figures in the first quarter are somewhat better than expected.
There is one player that's listed that made an acquisition of a project in this first quarter, the cap at which they made that was around 5.7%, if I'm not mistaken. You're talking about the projects and the rentals are doing fine. Having certainty about the sale that's scheduled to happen in the second quarter, if you could give us some more color on that, please.
Good afternoon, Victor. This is Fischer speaking. I would like to answer the first one, Resia, Kaká will answer. FGTS severance fund, well, it's already known to the public. The voting has started. We had two votes against it.
They asked to look at the process, which can take some time with the government and the association is doing a major work talking about the impacts of that movement because it goes against to what the government had planned for the use of the guarantee FGTS fund for Minha Casa, Minha Vida, My House, My Life program, housing program. There's still some time for things to change, but even if it continues, there is a great chance in our point of view that they would be somewhat more balanced for FGTS use. There are some alternatives being discussed, such as a complement on subsidies paid by the government. There's a lot of equity to be used. So there are some options to be used depending on the, how balanced it will be.
Based on our interactions, the government is pretty much aligned with the opinion of the industry and how this should be addressed. We believe that regardless of the decision that's still being discussed at the Supreme Court, the government will comply. We are now waiting, and we do wait that still in May, there will be some news regarding the MCMV, My Housing program, that continues to be developed. As for our strategy, our primary strategy remains unchanged. The advantage is that today we have a multi-channel, a multi-platform looking at different income levels. If you earn BRL 2,000 a month or BRL 20,000 a month, you can purchase something at MRV. This gives us flexibility and a good protective cushion in the event of extreme events.
Brazil basically has two funding sources for housing, which is Fundo de Garantia, FGTS, and savings accounts. I don't see any rupture coming from any of those sides. I don't believe Brazil would do that. If for some reason happens, we have flexibility of products to navigate through rough waters. I don't believe this is our base scenario. Everything is being done so that a balanced solution is reached. Every discussion in the past ended in a balanced solution. As Rafael said, the most likely scenario is to have some tailwind in the program MCMV. We are more optimistic than pessimistic about this overall discussion. Now, Kaká will answer the second question.
Okay. The project that's for sale in the second quarter of this year is Pine Ridge. The sales terms have been closed already, and there's only a due diligence pending. The certainty level that will sell this project is very high, let's say 95%-98%, but we only consider it sold when the final agreement is signed, the diligence finished, and the money is in the account. Everything is going well, and we believe we complete the sale by the end of the second quarter.
Okay. Thank you very much for the answers.
The next question is from Pedro Rainho from Credit Suisse.
Hello, everyone. Good afternoon. I have two questions as well. Continuing on Resia. As far as I know, the cap for next sales is something close to 5.8%, but later on, would we have any positive surprise on yield on cost? Because the construction inflation rates have been similar to those in Brazil. The second question is about the G&A of the Brazilian operation. I'd like to understand, can we envisage some reduction, thinking of closing of some markets? Thank you.
Hi, Pedro. Good afternoon. We'll talk about Resia first. Resia, yield on cost is calculated according to three variables: cost, the cost of construction, the cost of land, and rental value. What we see is a strong value for rentals, especially in Florida. Florida has had rental values above Georgia and Texas states. Regarding the cost, in fact, the inflation in the U.S. is much better behaved, and the cost is now moving sideways. The prices of land since they were bought two years ago in a scenario of higher prices, what we see now is a drop in land prices.
Considering all that, the yield on cost of 7%, which is our goal for Resia, obviously won't be attained in every project. Some will be higher, others will be lower. Thinking for that as a metric of the company, this is a metric we believe absolutely possible. It's like our golden rule in Brazil, going back to gross margins of 32%, 33%. Having a yield on cost on Resia of 7% is pretty much the same. As interest rates become a bit better, leaving the cap rate of around 5.8, it may take some time to go back to four, but if it goes to 4.8 or five within a year or a year and a half, the profitability of Resia will go even more.
We sold in the fourth quarter at a margin of 23%. The sale that will take place in the second quarter, will be slightly below that, close to 20%-21%. On average, this is our horizon, working with a cap of 7%. As I said in the beginning, Resia is a new company. It's an operation that still shows opportunities for improved efficiency in terms of the production model. We have the plant that's now in execution. In the next project cycle, we may work with a yield on cost that may be a bit higher than 7%, knowing that among products and markets, there is some volatility. As for the SG&A of MRV, the project of leaving the market of smaller towns started more than a year ago.
We made it public, not very long ago, but it's a project that will continue. There's no major change planned, like leaving the place overnight or selling land quickly. It's a gradual leave. First you stop buying new land, then you stop launching projects, then you stop constructing. It's a reduction of the operation happens in some years. It won't provide a significant gain in SG&A. Our gain in SG&A will come from the return on the 40,000 units per year at a price that went up much more than the SG&A cost. At some point in time, let's say next year, in which we have the revenues from this new lot and with the operation going back to 40,000 units a year. A quick calculation here for next year.
Let's say roughly 40,000 gross sales with cancellations. We could have a ROL of BRL 8 billion. SG&A gets diluted with time. We expect it to come from the growth of the operating revenue than from leaving the towns. When we leave these 40 towns, naturally, our current team could be more focused on fewer towns or in cities, which translates into an operational and managerial gain. We see more value in being operationally focused than having a reduction of SG&A in these towns. I don't know if I've been clear because I gave you a long answer, but that's the reason for the reduction on SG&A. We'll be even more efficient in managing our operation in the 90-100 towns and cities we'll continue to have operations in.
Thank you.
Thank you, Pedro.
Next question from Bruno Mendonça from Bradesco BBI.
Good afternoon. Thank you for the questions. I would like to ask about the Pro Soluto portfolio. We've seen a very positive trend in the average ticket of units to be sold and in the margin of new sales. That's a figure that makes us comfortable that the margin will recover. The question about Pro Soluto is if you could talk about how much Pro Soluto accounts for in terms of the unit value. How do you believe this will evolve towards the future, imagining that this percentage drops or remains as it is now? Also in this topic, to what extent can you move with the Pro Soluto without this additional indebtedness to impact the credit assessment of Caixa?
This is Kaká speaking, Bruno. What we've seen is that the portfolio risk, that is the percentage of Pro Soluto compared to the property value, has always been around 15%. Last year, as the prices increased very quickly, there's this dynamic with Caixa Econômica that we increased prices before, and then Caixa reevaluates the properties. That decreased the potential funding or for loans for customers that caused LTV to decrease a bit. Right then, we were more concerned about getting the margin back than decreasing the risk. Today we are operating at 20%. That's the Pro Soluto percentage of the portfolio. It's important to go back to 15%. It doesn't happen overnight. It's a gradual decrease. This is already happening. Also, there are two important points that things that may happen.
If there are changes in the operational housing program, either interest rate decrease, upper limit increases, income power purchasing, all that impacts. We are able to decrease the % of the portfolio that we grant. You probably seen about 1.5 to two months ago, the government talking about being able to fund the down payment. What does that mean? It means increasing the LTV. Today's that's currently offered by Caixa within the housing program. The maximum value is 80%. MRV gets 72%. That's the average LTV for MRV. There is also room for that to increase.
Okay, great. Thank you very much for the answer.
Okay, thank you.
The next question comes from André Dibe from Itaú BBA.
Good afternoon. Thank you for the presentation, for the question. I have two questions. If you could comment on bracket one announced in April, if you believe that the cap of BRL 170,000 per unit is feasible. What further constrictions do you need to define the size of the appetite to continue to develop products for that income bracket? Also, in terms of inflation, we see that the scenario is a bit more favorable in terms of inflation of construction materials and labor rates. Do you see some room for lowering costs of construction and then upward revision or review of margins expected for this year? From 26%-28%, maybe with an upside risk for these margins. Thank you.
This is Fischer speaking, André. Well, bracket one. Bracket one is indeed a priority for the current federal administration. This discussion has started before the government really started in January, and also the amount allotted to that in the transition pack is something that we believe will continue. This price of BRL 170,000 is quite balanced. It's been discussed, and it is reasonable for the current cost of property. Let's make it clear.
MRV has never been a company that operated in the bracket one. We don't plan to be there too much because we have a structure built to build a product, to transfer the product, our marketing structure. Everything is for real estate development. Our strategy is not to take part in that bracket. I see this movement with good eyes because recently we've seen growing competition, especially in middle-size and lower-sized towns with small and medium-sized local players.
These local players competes with us in a more aggressive commercial terms. We usually have more competition from these companies in smaller towns. I believe that the return of bracket one at higher volumes and higher prices could put us in an even more comfortable situation looking at competition in these locations that, after all, are the main locations for MRV. We do not intend to enter that market of bracket one, and I think it's beneficial for MRV because it will decrease competition in bracket two. As for inflation rates, in fact, we've had inflation under control in the last two or three months. Since 2021, we started including a future inflation view in our margins. We continue to do that, but we are not confident enough to say that there will be a reduction of costs with time.
Any drop that may happen, and we start to feel some movements towards that direction with the deceleration of the construction industry, nothing very impacting, but we do see the trend. We don't take that into account of our margins. If it happens, it will be an upside, as you mentioned, our margins will grow even further when compared to the current situation. We don't consider that. We do consider inflation in our scenarios, but if it happens, there will be an additional benefit. We start seeing that, but it's not impacting so far.
Perfect. Very clear. Thank you. Have a good Friday.
Next question from Hugo Grassi from Citi.
Good afternoon. Congratulations on the presentation, on the results. I would like to learn more about the competition conditions. How is it evolving at this price level you mentioned?
You mentioned smaller local players with aggressive prices. What is the resistance in searching for sales volumes at that price point, especially in São Paulo, where you said you would like to double your efforts because there are more competitors in that market, right? The second question is about what you commented on the release, speaking of an increase in the sales efficiency of the company with several adjustments made to the sales machine, between quotes. Could you comment on that, please?
Hello, Hugo. This is Rafael Menin speaking. Well, as for the competition, there's a very peculiar characteristic, which is the operation in the market that's much larger than our main competitors operate in. We're exposed to a much larger population. I'll give you an example.
In the first four months of the year, the cities that which we had highest sales were Salvador, Maceió, Campo Grande, São Luís, Cuiabá. São Paulo is also in this group or six or seven cities with highest sales figures. This allows us to launch products in cities or towns with high demand and reduced supply. São Paulo, for example, that you mentioned as a very competitive market, it is by far the most competitive market in São Paulo. Despite the size, income, the demand is huge. The market of São Paulo today accounts for 5% of our operations. This could increase, reach 10%.
It's possible, the excess of competition or if competition becomes even fiercer in São Paulo, our operation will not be affected, because we operate in major, almost all capitals in Brazil, as well as medium-sized towns and cities such as Ribeirão Preto, Campinas, Londrina, Uberlândia. MRV is the only real estate company in Brazil exposed to all main real estate markets in Brazil. Did I answer your first question, Hugo? Is it clear?
Yes. Thank you.
As for sales, there was no silver bullet. Several in-company actions that were made and taken, and also some external factors that caused prices to increase, and more recently, an increase in volume. Talking about external factors, there was an adjustment to the program in August with authorization of subsidies and interests.
In January, the ceiling increased by 10%, except for Rio de Janeiro, Brasília, and São Paulo. Competition in general is lower than it was one year ago, which is important. The 3rd important leverage is the fact that MRV is a price maker. When we changed and increased prices very quickly, at first, we lost a bit of market share. Naturally, the market co-accompanies our prices due to a survival issue. Small and medium-sized companies still face a major challenge in their balance sheets. We've seen that in the markets we operate. This rebalancing of prices in the market as a whole is important. MRV is a market leader in terms of our brand and product quality. This leverage has helped us in recovering volume.
Another leverage mentioned by Kaká is the assessment of a properties made by Caixa Econômica. Last year, our prices were very close to the evaluation made by the bank, which helped in affordability. As we raised prices 25% in 12 months, there is a delay in the evaluation made by Caixa. Caixa takes longer to adjust their evaluation prices than the rest of the market. There is a mismatch there. Its situation currently is much better than it was one year ago. Our price increase is slightly above the evaluations. Evaluations are getting closer to our price, which helped us to recompose the purchasing capacity of customers, then affordability increases. Finally, There are so many leverages in the call that's hard to explain in a few seconds, but we made a lot regarding sales team, compensation, training.
That's the sales machine, as I said. CRM, lead generation, marketing. Many actions were taken in that scenario. In a scenario that was a bit tougher in terms of sales, if we compared affordability, it was easier to sell properties in Minha Casa, Minha Vida four years ago than it is now. The team has to be better trained, better prepared, but we're able to do that. Today, we have a sales team or a sales machine that's more prepared and more powerful than it was one year and a half ago. If we add all that allows MRV to continue to raise prices above inflation and volumes on a monthly basis. It's very likely that the second quarter will be better than the first quarter in terms of sales.
Perfect. Thank you.
Our next question comes from Jorel Guilloty from Goldman Sachs.
Good morning, everyone. Thank you for answering my question. I would like to understand the average customer profile of MRV Inc has changed in Brazil potentially. As you mentioned, you raised prices significantly by 25% year-over-year in this quarter. Could you describe your average buyer? What is the monthly income of that buyer? The amount of subsidy has changed. Do you see a change of them moving between bracket three or two? The exposure is different. Any information will be useful. Thank you.
Hello, Jorel. This is Rafael speaking. The profile has changed. For the same two-bedroom apartment in Uberlandia, today's customer has to have a higher family income than it used to have, than it had to have three months ago because the program was not updated according to inflation. We had an adjustment.
There was an adjustment in August, another one in January up in the ceiling. These two adjustments were not sufficient to offset the 30-some inflation rate we had, which obliged us to increase prices by 30-some%. The gross margin of new sales is close to that, the one we had the pre-pandemic cycles. Today it is indeed more difficult to sell. The company had to improve lately. We also had the fact that the program improved a bit, but it's still not up to date. Any adjustment made in the program during the year and with a stronger sales team that we have today operating in towns and cities that supply and demand are more balanced. Today we're also more selective in terms of launches.
We only launch products that have a good margin with good time to do a strong pre-sales effort. Everything that help us to sell better, sell more in a tougher scenario when compared to three to four years ago. The market as a whole has decreased. If we compare 2014 to 2019, bracket two and three amounted to 400,000 units per year. This market in 2021 and 22 amounted to less than 300,000 a year. The market decreased by 25% altogether. That's due to a housing program that was not adjusted according to inflation that happened in Brazil during the pandemic. Do you have any further questions? Was that clear?
Well, I would like to understand that given that this buyer has a higher monthly income now, they don't depend on subsidies so much. They are less on bracket two and more on bracket three.
Exactly. We used to sell much more on bracket two and less on bracket three. Today, our sales are more balanced between the two. We increase prices, naturally, we had to sell the same apartment that used to be sold at bracket two, now in bracket three. An apartment that used to be bracket three became SBPE. That's why it's so important to adjust the rules of the housing program that will allow us to include an apartment that it's SBPE becomes Minha Casa, Minha Vida again. It's all right. We can sell a tower with 20 floors. You sell the upper floors at SBPE and the lower floors in Minha Casa, Minha Vida. The higher the limit, the more units we can fit into the program.
When there is an adjustment to the rules of subsidies and interests, which is correct to happen, our customers will migrate to bracket two or whatever name that has. This customer will get more subsidies, more interest. This migration that happened, the increase in bracket three in recent years could become less representative in the future. Bracket two will become more significant.
Okay, that's very clear. Thank you.
Next question from Marcelo Motta from J.P. Morgan.
Two questions. First, if you could comment on what's missing for the margin at the end to reach 33%. Is this final price increase has more to do with the changes in the housing program or something in the cost of the land could be made until the fourth quarter? How do you see the sales oversupply? You mentioned that April and May were okay. I would like to understand if the pace of sales will continue in the second quarter so that you can reach 40,000 units throughout the year. Thank you.
This is Fischer speaking, Motta. Well, as I said earlier, our margin for the year does not consider cost reduction. What would increase our margin is a price adjustment that we've been able to implement on a monthly basis, also considering growing volumes, as Rafa mentioned earlier. The base scenario takes into account our power of pricing. The good news is that we've been able to do that with volume. Obviously, if there is a cost reduction, that will naturally be positive. Also we've been noticing in the last 18 months is a reduction in the cost of land. We've been able to do better deals, and that helps in margins as well.
The original plan to reach that is basically based on our sales strategy, in which we've been able to drive prices and volume. This is the good news. As for your question about the quarter, April has been good. May continues to be so. We believe we'll have a better second quarter than the first quarter. If nothing changes, we'll continue at the pace we closed the first quarter. March was very strong and we entered April and May at the same pace. We believe we'll have a second good quarter. A good second quarter. Thank you.
Next question from Fanny Oreng from Santander.
Good morning. Thank you for the question. Two simple questions. First, regarding production. What do you expect in ramp up for production in the next quarters and PSC? The second question is about other operating revenues and expenses. There were some costs regarding penalties for aborted projects. Could you comment on that specific line? Thank you.
This is Fischer speaking, Fanny. I'll answer the first one, and Kaká, the second one. Production. Obviously, it's no secret that our main driver has been increased margins and cash. Production is in a way that although we start selling a lot in the beginning, construction starts with a cash burn in the beginning. We have a management focused in cash. This is why the pace of construction has been smaller than what we usually practice. At the end of the second and third quarter, we have production in line, nothing much different from that.
Ramp up in production maybe will start in the fourth quarter, beginning of last year, when these construction projects are well sold, and then they will start generating cash. With the second quarter production in line, third slightly bigger, and then ramp up for the fourth quarter and first quarter 2024. Cacá. The questions about other is about MRV Brazil? Yes, Cacá.
Okay. Fanny, the point is that whenever we acquire a land, there are several studies that we made. Topographic assessment, soil assessment. Sometimes we have to do some maintenance, cutting trees, etc., or trimming. Sometimes we do not buy that land. There is a line that's like land we intend to purchase.
All the expenses we incur to buy a certain land or a lot that we were studying that land for, let's say, several months up to a year, and then at the end we don't buy it. In this quarter there was a slightly higher expense. It's not 100% non-recurring, but it's a bit higher than normal for these intended purchases.
Okay, that's very clear. Just to follow up on Fischer's answer. Fischer, Does the fact that you postponed the beginning of construction fits your delivery dates for your launches? Could there be a slight mismatch, or are you increasing the delivery terms?
Good question, Fanny. No, there's no mismatch. Respect to customers is a golden rule for MRV. We usually launch something for 36 months, and we used to anticipate that, but now we'll remain within the, this term. We may start a bit later, but we never consider mismatch between the sales and the delivery terms. We never break that rule. We're working within this cushion that we have, like so, room for maneuver.
You promised 36 and you deliver then?
We used to have a room for maneuver for 3-6 months, depending on the sequence of molds, and we built in between 18 and 22. We're talking about 26 months now. Today, we go a bit longer depending on the situation of the development, and in some cases, we are using the full 36 months. Thank you.
Next question from Elvis Credendio from BTG Pactual.
Good afternoon, Rafa, Fischer, Kaká. Two questions. First, about margin. You've given a guidance of gross margin for the year, 22%-24%. I'd like to understand more about the speed of recovery of this margin on a quarterly basis. As you deliver projects with, from older times, what is the timing for these projects that are older? Will there be any consequence in this 1st quarter? Could the margin increase in the 2nd half of the year? The 2nd question is about the changes in the program, because one of the changes that's been discussed is increasing the upper limits. How significant is that for you? If there is such an increase in the upper limit, how significant could that be for the company? How much of your inventory does not fit the program limits? Thank you.
Hi, Elvis Credendio. Regarding the upper limit of the program, we noticed that that's very significant if there is an increase in the upper limit, because today there is a major mismatch between interest rates inside the program and outside the program. It's speaking about 7.5+ TR compared to 9.5%-10%. The purchasing power increases considerably. If that happens, there are several actions. One of them is increasing prices that would increase margins. The second is just the sales oversupply that could increase. The third point is the reduction of pro soluto, the risk of the portfolio. The increase in this upper limit is very significant, and we are quite confident that it will become true. Regarding margin, there should be no major increase.
We believe the recovery will be gradual. As we become, we get rid of these margins of these owed projects of 2021, margin increases. We said in the beginning of the call that we'll close this year with 25-26. As of next year, we'll be rid of all the projects of 2021. The worst would be 2022, whose margin was close to 26%. Next year, we're starting at 26 and end the year about 30. The year of 2025 is when we'll actually have more normalized projects of sales. The guidance is 30%-33% of gross margin for the year.
Okay, Kaká. Very clear. Thank you. As for the units that are not included in your inventory, do you know how much is under SPP?
Out of the total inventory, 35%-40% is not. It's outside. Half of it could fit again, depending on the upper limit increase. The rest are products that were made to remain outside. There's a major difference in geography. In the Northeast capitals, there are much higher mismatch than the rest of the country. That could favor some regions better than others.
Okay, perfect. Very clear. Thank you.
This ends the Q&A session. I would like to call Mr. Eduardo Fischer for his final remarks.
First, thank you very much for attending. Very active call. It's been great. Excellent questions. I would like to highlight two macro points. As you could see in our release, and especially in the Q&A session, we are following, continuing in line and a bit advanced to what we planned for the year.
We're quite comfortable that the operational recovery is coming according to plan. We have a commercial strategy that's very important. It was very important in 22, remains so in 23. We have delivered on it. Production and engineering, that was a problem for us in the last 18 months due to inflation increases, is now much better and in line. On the real estate development, we're buying land in much more advantageous conditions than in the past, so we're planting for future harvest. As Rafael said, that's a beginning. Better conditions that we had the pre-pandemic. We'll end the cycle better than we when it started. This is the major good news. Another important point is, regardless of discussions about FGTS and the Supreme Court was discussed here, it's becoming clearer and clear that housing is a primary issue for any administration for many reasons.
Regardless of this discussion about the FGTS fund, I am very optimistic that this industry as a whole are priorities for the nation, for our society, and will be the focus, especially of this administration. We have many positive fruit to reap in the future as we go back to the resumed normal MRV. Despite we do have important homework to do and important projects to deliver, I am very optimistic about what we've built and that we continue on the path we have planned. Thank you all very much. We'll see you on the next calls.
The conference call of MRV has now ended. We thank you all for attending. Have a good afternoon.