Ladies and gentlemen, good morning. Thank you for holding and welcome to MRV's Q2 2022 results conference call. For analysts and investors. Today with us, we have the CEOs of the company, Mr. Rafael Menin, Mr. Eduardo Fischer, and the Chief Financial Officer, Mr. Ricardo Paixão. We would like to inform that all 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. Should any participant need assistance during this call, please press star zero to reach the operator. Now I would like to turn the floor over to the CEO, Mr. Rafael Menin. Mr. Rafael, you may proceed.
Good morning. Thank you again for attending our call to talk about the Q2 of 2022. Well, it's important to highlight that MRV&CO.
Today is a much more complex and complete company than the company it used to be some years ago. We are in several avenues of growth that provide a very important resilience to the company. Let's talk about what's going well, and then we'll talk about what we need to improve. We changed the name of AHS to Resia. Let's start with Resia. Due to several aspects, demography and the market in which we chose to operate and the three states we operate and also our construction model, there are several variables that cause us to have a very competitive product today with a gigantic demand, and that, at the end of the day, has had a return that is higher than what we had foreseen in our business plan when Resia was acquired in the beginning of 2020.
We're very optimistic about this company, and we are convinced that Resia will have a positive effect on the balance sheet of MRV. As I said before, we aim to have 12,000 units transacted per year. We're in. This is a market, it's a very large one. Only in the three states we operate is $1.5 trillion, which is twice the GDP of Brazil. Housing is the main social pain. People are having hard time buying a house and renting a house. Resia is a solution that has worked very well with a very high adoption rate at this moment. Resia, towards the future, has very large potential market still to be explored. Now talking about Brazil, let's start with Urba.
It is still a small company that is gaining traction every year. We tried to go to market two years ago, and since then, everything that was included in the business plan happened. It has doubled its size year after year. We have a Q2 of very important launches. Our business model is very good. We have been able to advance the receivables portfolio. This is due to the credit we have in the market, as well as to the quality of the product. It's a very high quality operation and will also be a component for the exponential growth of the company. We have grown exponentially in the last three years. We'll continue to do so, and three to five years from now, it would be even larger. As to the SBPE funding, there are two brands.
One is Class under the MRV umbrella, and the other is Sensia under the MRV umbrella. We have an important portfolio of launches for this year. We'll also have a growth close to 100% for next year. We expect the same dynamics. In the short run, the interest rate is a bit high, but we always look towards the next five to 10 years. We're sure that these two brands will be very complementary to our portfolio and improve the resilience for the potential growth of MRV&CO . We are sure that this has been the right strategy, and it's possible that we have an important figure and these two brands added will play a very important role in the middle-income market in Brazil.
Finally, talking about MRV, which is the product that we've had for so many years, a very industrial and standardized product with an infinite demand, I would say, in the Brazilian market. This is the product that has suffered the most. We had the capital to invest in Urba, Luggo, and Resia, and it's another company also that's doubling its size every year. Which allowed us to enter these new avenues was MRV. It is very differentiated when compared to the rest of the market. If we look at the year of IPO, 2007 until 2020, we've always had a very good performance. It worked like a clock, you know, generating cash for five consecutive years. That allowed us to rebuy and allocate funds to dividends to Sensia, Urba, Luggo.
It was very important for MRV&CO . If we look at it now, this is the division that's suffering the most. The easy explanation for that is inflation. Of course, inflation has brutally affected our operation. We transfer prices much slower than the inflation rate of approximately 30% in the beginning of 2020. Right after the beginning of the pandemic, we've had INCC increase 30%-32%, which is brutal, and we haven't been able to transfer prices at the same speed. It's important, you know, to say that we understand that, but of course, we were very aggressive with the products of 2020, and there's nothing to do about that. We knew that inflation was high, and we should have been more aggressive in transferring prices.
We transferred prices much slower than the inflation was growing, so the gross margin went below 20%. 22%, which is very low, different from our historical figures. If we look at the company from 2007 until 2020, so for 13 years , it was the company with the best operational quality by far of its industry. Last year, the gross margin was very low, close to 20%. What we have done lately was to increase the speed of transfer of prices, and that is in effect already. We included in the release a gross margin for new sales of 25%, so with interest. Without interest, that would be around 29%.
It's far from what we believe it's healthy, but we have delivered several sales with a closed 20% and will be included in our income statement. If we look at the glass half empty, we will have a gross margin during some quarters that would be poor. Looking at the glass half full, we can say that the gross margin of new sales is recovering month after month. We don't believe we'll have an inflation rates of 30% again. The expected inflation, we believe that this gross margin for new sales will accommodate future inflation rates, and we see some more favorable negotiation of supplies, some materials we're able to reduce. We believe our future inflation will work well. We're being even conservative, so to speak, because this is not the time to change that mindset.
I believe we have to be more conservative regarding future inflation rates. We may have some positive surprise in this gross margin with inflation embedded, but it's better to be conservative now. Looking back, we could have been a bit more aggressive, but the moment is to look forward and make the most of what we have now. The inflation in the period was 30% and what was allowed up until now allows us to increase prices by 10%. There are some points being discussed that will allow for a new transfer of around 8% in prices, you know. In addition, competition is low because this industry is much more fragile than it used to be two years ago. MRV is the main company in this industry, and is the main brand.
That allows us to increase prices above inflation rates. In July, for example, this gross margin of new sales was around 27% and will work so that we'll reach the year-end close to 30%. Next year, as we said in the release, we want to work with at least 30% of gross margin for new sales, trying to reach 32%, which is the average level that we had in the past. We believe it's very possible to have a gross margin for new sales. For the accounting margin, booking margin, there is a delay, but it's a consequence of healthy harvests, healthy periods. In the second semester, we'll have more launches that will have healthier gross margin. That will be very important to have new sales with healthy margins. Well, cash generation is a consequence.
As we build these sales of 30%-32%, the generation of cash has a time delay, but it will accompany these healthier margins. We believe that the worst has passed and the company will continue to be efficient. We have to increase our prices and we'll be able to do because we've done our homework, also because the competition is less stiff and due to the adjustments in the program. When I look at MRV growing so well in the other avenues with very good results and the development division in Brazil recovering gradually, that causes us to be very optimistic when looking at the future. Although we are concerned about the performance of the MRV in Brazil. We are working very hard to improve the performance of the only operation that is not on track.
I'm sure that soon we'll bring this division back to the operational level that we've always had. Now, I'll send the floor over to Cacá to talk about the financial aspects, and then we'll move on to the Q&A session.
Thank you, Rafa. Good morning, everyone. We had a technical problem with the operator and this is why we didn't start on time, so I apologize for that. Before we start the specific details of the quarter, I would like to highlight some points. First is the review of the Casa Verde e Amarela housing program. In July, important changes were implemented in the program. Two of them. We had adjustments in sales for groups two and three, an increase in subsidies provided to eligible families.
Other important adjustments are still to be made, and we should make the most of these movements in full in the Q2. Change maximum period for financing from 30 to 35 years and consigned FGTS, a rule that allows using 8% FGTS deposited monthly to assist with monthly payments. These changes will be important accelerators in the recovery process of the company's margins, and they are ongoing, as Rafael mentioned. Resia is the next highlight Rafael mentioned, but I would like to highlight two important points. On page five, we highlight the recovery of more than 60% of the projects closing the quarter with $1.6 billion, almost $9 billion. On page number six, we show the evolution of NAV reaching $801 million.
Now, going through the financial indicators of the Q2, I would like to say that the cash generation were BRL 317 million and 115 in the net income, adjusted by the share buyback program and swap. In the 12-month analysis, we see the accumulated retained earnings increase 15% when compared to the Q2. Having said that, we have an ROE in the last twelve months of 14.1%. These were my comments. Let's now move on to the Q&A session. Thank you. We'll now start the Q&A session. If you have any question, please type star one. Our first question comes from Gustavo Cambauva from BTG Pactual.
Hello, everyone. Good morning. I would like to ask about the gross margin.
You've mentioned that you expect a margin above 30% for the future. My question is, does this margin already consider all these changes that will be implemented for Consign, FGTS, increase in financing maturities, or term? So just to confirm. My second question is, Rafael mentioned in the opening remarks that there are some costs that start to improve. Could you give some more color about what do you see, what lines of materials that you see improvements in prices or maybe something about efficiency or construction process that you see improvements in, and if you could quantify that in terms of improved costs. Thank you and good morning.
Hello, Gustavo, this is Fischer speaking. Good morning. Well, as for the gross margin, obviously we, when we say 30%, we consider it an in-house target in the journey of margin recovery, basically through prices.
It does not consider many of these actions. Those changes in law allow this journey of pricing to continue. Just to add to what Rafael said in the opening, obviously we may have been a bit conservative in deciding when to start to raise prices, because obviously we have a very large company and we are naturally afraid of impact on income as we increase prices. We moved on and liquidity remains stable. Now we are much more confident that this continuous adaptation of prices can continue without any impact on liquidity, or rather with a positive impact on liquidity. Answering straightforward, these 30% consider the current movements, although some of them have not been applied yet. Looking forward, we'll have a capacity to reach those figures quicker, on one hand, and also a liquidity that may increase.
We're still testing the impacts of these movements in practical terms. A part of them became effective in the end of July, and the other part has not been implemented yet. In terms of costs, we've seen some stability in the Q2. There is the salaries adjustment, the collective bargaining agreement that is done in the Q2 that was heavy in São Paulo. The other end that had the most impact for us in the last 18 months, which is the line of materials, we see stability and some prices dropping. Stability is important in some costs that are most relevant for us, especially steel and concrete, and dropping or decreasing prices in PVC and copper cables, et cetera. We see a more stable behavior in the Q2.
I don't see an inflation similar to what we had in the past. We do see some drop in inflation in some cases, so we're more optimistic considering future inflation rates. I hope I have answered your two questions.
Yes. Thank you, Fischer. Great.
The next question comes from Pedro Fajardo from Credit Suisse.
Hello, everyone. Good morning. Thank you for the presentation and questions. I have two questions. First, I would like to know if you could share what you see in terms of competition dynamics. I understand that at the same time we are gaining market share for more structured players. At the same time, we see many companies converging to the same income level and similar products. What do you see in terms of competition, and to what extent do you believe it's possible to increase prices without losing sales oversupply?
According to your operational results, there has been a drop in the number of units produced. If you could give us some more color about that drop, maybe slower construction cycle. Overall, these are the questions I have. Thank you.
Good morning, Pedro. This is Eduardo Fischer speaking. Well, about competition. In fact, we see the larger players converging to a higher income bracket. This is a natural effect of this pressure on costs and the income capacity or purchase capacity of a lower income. But that happens especially in larger cities, São Paulo, Rio, Belo Horizonte. When you move on to smaller cities or towns, you see that happening less. What you see is competition decreasing because all these things we mentioned affects much more heavily medium and small-sized competitors. So we see a shrinking of competition and continuously.
This return tends to be slow because the process of approving the purchase and making a product available for sale on the shelf is slow. I don't see these players coming back to the market anytime soon. In the next quarters, we expect less competition or especially in smaller cities. We do expect an emptier market in the next quarters. As for production, Rafael said something that we do have cash management to do, and this is more challenging because margins are lower currently. We try to adapt production and revenue that comes from it to this cash management policy. Some construction will start a bit later, expecting let's wait for more sales. What reflects on the production volume is cash management. We wanted to have it better, adapted and always thinking about cash generation.
Of course, as sales increase and we have if production will accompany and become quicker. That could change the speed for the next quarters. I hope I have answered your question, Pedro.
Yes, you have, Fischer. Thank you.
The next question comes from Igor from XP Investimentos.
Good morning. Thank you for the questions and presentation. I have two. First, could you give us update on Resia about capitalization? What are your discussions about valuation? And the second question is, with this most current update on CVA, your idea is to accelerate the number of launches as much as possible to make the most of this improvement in affordability, or will you be more cautious along those lines you were mentioning before the update to reduce the size of the operation?
I would like to understand what you're thinking about given the most recent updates.
Well, this is Ricardo speaking. Resia, right now, we cannot make any further comments on the transactions right now. If there's anything we need to report to the market, we'll use the communication media to release that to the market as a whole. As for CVA, yes, we will accelerate launches in the second semester. In the Q1, our margins were tighter, we didn't have the profitability we would like to have for all ventures. In the second half of the year, we'll see launches that we had postponed, awaiting some improvement in the financial and economic conditions.
The number of launches in the second half of the year will be much higher than the first half, which increases our degree of confidence in terms of profitability levels. Because of these changes, we can have a better purchasing capacity, and so they're more affordable and more potential customers can buy their home. This is why we'll increase launches in the second half of the year. Thank you, Kaká.
Thank you. The next question comes from Fanny Oreng from Santander.
Hello, good morning. Thank you for the question. I have two questions. One is about the assumption. Rafael mentioned that you've been quite conservative regarding future inflation rates. Could you share with us the assumption for that, and how does it compare to the previous assumptions on inflation?
The second question about HS: how do you see the speed of leasing of projects given the most complex economic scenario in the United States and the yield on cost? Because there is a reduction of which favors Resia. The inflation in the U.S., as in Brazil, was very high. The costs increased very much at a speed that's lower than the value of rents, but it does went up. We see some more benign scenario, but there's still pressure on costs. These two variables, costs and rentals, we believe that what's going on is a good operational quality that translates into a good yield on cost. This multifamily class of assets is. There's a high demand for it.
This allows us to sell at a low cap rate, because at the end of the day, what matters is the gross margin of the transaction. Having a yield on cost close to 7% and selling at 4-4.5 translates into higher than 30% margins. We've seen so in Resia's operation in the last 12 months, and this is the same forecast for the next 12 months. Okay, perfect. Thank you.
Thank you, Fanny. The next question comes from André Mazzini, Citibank.
Hello. Thank you for the call. The first question is pretty much what income has benefited the most from these changes in Casa Verde e Amarela? Let's say BRL 3,000 income level will have more benefits, or maybe we'll see more prices converging to attack that income bracket because it has the most benefits in these changes.
Outside this program, the Sensia units can now be financed using Pró-Cotista credit facility. This would be an important funding for you. The second part of the question is the timing for the rollout of the measures for the other actions for the Q2, the second half of the year. For FGTS consignment or if any. All these measures that are pending, will they be implemented in this Q3 or the fourth one? Okay, this is Fischer. Let's start with the last question. As for the measures, some of them were implemented in the end of July as the income bracket and the added subsidies. There are two important ones that haven't yet been effective, such as from 30 to 35 years term. I believe we will implement it shortly.
As for the FGTS consigned amount, that depends on the approval of the council that is scheduled to happen in September. I believe it will become effective as of October, impacting the Q4, most likely. These are two important events that haven't yet been implemented. Now, going back to your first question, these measures do not have a uniform impact. The 35 years impact in a linear form the income brackets. The income brackets changes were very beneficial for MRV customers because that bracket of BRL 3,000 to BRL 3,500 was highly impacted with those measures, and that's very good for us. I would say that after these are implemented, we'll have a high potential of standard customers that whose income goes from BRL 3,000 to BRL 4,000 reais.
We'll bring two groups in which we're group one. We suffered a bit. It was almost extinguished in the company. Group one now has credit capacity and will go back in the game. The other end of the spectrum, which is that credit facility Pró-Cotista. When we look at the number of units that were not part of the system, and now we see some units that are no longer part of the program, it's very important. We're very excited about what's going on, and if everything goes into the timeline that we expect, we'll have good tools to operate well in the Q4, which is traditionally a good one. In general, this is it. I think I have answered all your questions.
Yes, Fischer, it's very clear. Thank you.
Our next question comes from Bruno Mendonça from Bradesco BBI.
Good morning. The first question is about the portfolio sales of Pro Soluto. How much do you understand there could be, recurring sales, maybe on a quarterly basis? And is it possible to reduce the guarantees? What's the timing you need to run on a different balance between guarantees and rate? The question is: Is the portfolio that you generate every year, how much do you believe you can sell on a recurring basis? And the second question is about Luggo. Could you give me an update about the development of the business? It has a very good portfolio. Real estate funds, market is still not present. How do you see Luggo in coming years? Thank you.
This is Cacá speaking, Bruno. Let me start with Luggo. At Luggo, we have an aggressive growth plan from now on.
This agreement with Brookfield brought some safety in this moment in which real estate investments are not so high because of high interest rates. We are accelerating. We've been able to add more projects to the pipeline. We're buying land and developing more projects for construction, so we can have more Luggo projects in coming years. The margin is accelerated when compared to the initial plan we had for the next two or three years. We see Luggo as something that will be significant within the business volume of MRV from the medium to long run. In terms of recurrence of portfolio sales, I'd say that the last transaction we made, we wanted to increase the base of buyers. We sold to one specific buyer last year, and now we have eight different privates.
The idea is to increase the market of the buyer's credit. We have very good negotiations with our analysts. We have the MRV Banks. The feedback we have received is quite positive in terms of our placements. Recurrence, I'd say BRL 580 million per year. Being conservative, I believe we can perform that. The challenge would be to transfer all the principal for the portfolio sold in one year so that it would not increase. It's adjusted by IPCA +1%, so we won't have a stable portfolio year-on-year. As for guarantees, just roughly 3%, the guarantee, the amount. The 3% default rates, the one that's not translating to default goes back to the company. In booking that transaction, we have other financial liabilities other than banking debts to offset that.
We have an internal area that is thinking about other ways of having similar transactions to these, so that we can have more buyers to buy our receivables. So we believe we have two or three more transactions until the end of the year, similar to those we have conducted so far.
Okay, thank you.
Next question from Daniel Gasparete from Itaú BBA.
Good morning. You were very clear in your presentation. Could you give us a clear idea about cash generation in the Brazil operation? Should it have a positive inflection? The negotiation of the receivables and as well, the same for margins, if you could give some more color. Thank you.
Good morning. Okay, regarding the gross margin. As I mentioned in the beginning, we are building healthier sales. Our income statements is a combination for two years of sales.
Today we have many more sales with margins close to 20% and fewer with the margins of June of 25%, for example. As time goes by, you reduce the sales with lower gross margins and increasing those with gross margins above 25%. In July, the gross margin reached 27%, and we want to reach the year-end close to 30% of gross margin. Certainly the gross margin for 2023 will be better than that of 2022. Generation of cash and the consequence of a better gross margin is a higher cash generation. As Cacá explained, our target is by selling the portfolio and what we receive from customers is to have a very small growth on accounts receivable. If accounts receivable are not growing and they're under control, the gross margin minus expenses means generation of cash.
In a very rough calculation, the company costs 20% as G&A, taxes, other expenses, financial expenses. All of these expenses add up to around 20%. If the gross margin of the company is 20%, the bottom line is close to zero. When you have an increase of accounts receivable with a bottom line close to zero, they will have a cash burn. As we're able to increase the gross margin to 23%, 25%, 27% and accounts receivable does not grow, you start having generation of cash. In the second half of this year, we'll still have a condition that is similar to operations in the last quarters with a very tight gross margin. As of next year, if the gross margin continues to grow and we control accounts receivable, we'll have a positive generation of cash.
This is a dynamic that improves quarter-on-quarter, and it's not a quick growth. This is our plan. Our plan is to be able to increase gross margin, working to reduce SG&A a bit from 20% to 18% and keep accounts receivable stable. Have I been clear?
Yes, very much.
Thank you. Just a follow-up. We noted that the margin of Brazil's operation has decreased quarter-on-quarter. Uncertain, could you repeat? The gross margin to be and earned. Our half is composed of projects, current projects and prior projects. All the current projects have a future projection of inflation embedded. The old projects, we had extra money and the projected inflation already happened.
Although we have an increase in the cost because of INCC, the older sales had a drop in margins and we had an increase in margins in recent sales.
Okay. Thank you, Cacá.
Ladies and gentlemen, if you want to ask a question, please press star one. This ends the Q&A session. I would like to turn the floor over to the CEO, Eduardo Fischer, for his final remarks.
Good morning again, everyone. Thank you for attending the call. I would just want to wrap up, going back to one point that we ended up not discussing. This company, MRV&CO, that was created some years ago. In its different avenues, as mentioned by Rafael in the opening, has been able to deliver significant growth.
We haven't addressed that now here, but when you look at the first page of our presentation, it's the company that has delivered BRL 900 million in net income. It's very important, and it consolidates our growth and diversification strategy in a very clear way. Of course, we talk about other topics here, but this should not be overlooked because we've managed this company to grow, be diversified, and add to the company's performance despite the challenging scenario. The Brazilian economy has been through a challenging period. We had a very high cost pressure at the end of 2021. The need for repricing, certain insecurity regarding the results we could deliver.
After this first half has passed, it has become much clearer for the company and for us executives that the movements we made in MRV as well as by the government and Caixa Econômica Federal in this first half of the year makes us very confident that what we have built in this first half of 2022 tells us that we are on the right track to deliver everything we promised. We are very confident that all these movements that happened in this H1 of the year will place us at the level that we used to be in the last 42 years. This is the main message. There's still work to be done. We have achieved interesting results. Thank you all very much for your participation, for attending, and we'll see you in the next call.
Best regards to everyone. The conference call of MRV has now finished. Thank you all, and have a nice day.