Direcional Engenharia S.A. (DIRR3.SA) Earnings Call Transcript & Summary

Welcome to the earnings release of the Second Q '25 of Direcional Engenharia. I'm Andre Damiao from the IR team of Direcional. I'm here with Ricardo Gontijo, CEO of the company; and Paulo Sousa, CFO and Investor Relations. Now we're going to begin, show you the main operational and financial highlights of the quarter, and then we will open for questions and answer. [Operator Instructions] Also we have the YouTube channel. The link is in our IR site. And also you have the link to download the material we're going to show you here. We are recording this event, so, eventually, we can have this in IR site in our Results Center. So to begin the presentation, I would like to give the floor to Ricardo for initial comments.

Good morning, everybody. So here we are again to talk about the results of our second Q '25. And I would like to thank you for your participation here. And we will show you the main highlights, and afterwards, we are going to answer all your questions and answers. Andre, let's begin with Page 3, the main highlights. And I would like to stress that we have been delivering a quarter with very resilient and consistent numbers, a gradual improvement quarter-after-quarter, reinforcing what we've always tried to share with the market. So these are very positive results in our vision. I would like to highlight some points that I believe are very relevant before we go on to the other items of the presentation. So when we compare the second quarter '25 with the second quarter last year, '24, we have growing launches, 40%, net revenue, 26% growth; gross profit, 39% growth; and net operating profit, specifically when we exclude the minority interest line, which had a relevant impact of the sale of the sale of a share of 9.98% of Riva. So our minority interest has a slight increase, but we see an operating net profit growing 36% year after year. So these are very robust numbers. And we can see in the highlight here is the profit going over the revenue, which for us is very positive. And here, it is important to stress all of these items, launches, revenue, profit, were records here in our quarter -- in our history of more than 40 years. And I would like to highlight the gross margin, the record gross margin. We delivered a gross margin adjusted by interest rate with regards to interest production of 41.7%. In the last year, we delivered a growth of more than 4 percentage points in the gross margin. This is very relevant. Another very expressive point here this quarter that I would like to highlight is the growth of our future revenue. Our deferred revenue and the total of this deferred revenue, it went over BRL 3 billion, BRL 3.3 billion. And the deferred revenue -- the backlog margin grew 7 points, reached 44.9%. This KPI is very important. It went from 44.1% in the first quarter to 44.9%. And the relevance of this KPI is basically because it shows us very clearly that the new sales in the company have been done with very strong margins, very positive margins, which somehow gives us comfort when we know that the gross margin we reported in our statements of accounts will remain very solid in the following quarters, because after all, today, we have our backlog margin more than threefold the revenue we recognized in the second quarter in our statements of account, a little more than BRL 1 billion and a backlog margin more than BRL 3 billion. So we have our future revenue with -- for more than 3 revenue -- 3 quarters here with operating revenue that we see with record margins. When we look at a slightly greater interval here in the chart to the right, it's important to stress the greatest level of net -- operating net margin in the company in the last 10 years -- more than 10 years. And today, we reached this quarter to 19.5%. So when we analyze the last 12 months, closed now June '25, our operating net margin was 19.5%. So this level is very relevant, very important. We have been able to have -- in this process of growth that this company has gone through, we have been able to see important benefits in terms of synergy and gains in scale. So when growth occurs in a way that benefits us with this greater scale, this greater negotiation capacity with suppliers and gives us operational leverage where we see sales and revenue going above the expenses giving us margin increment, this growth is happening in a solid way, it makes sense, and this is what we have been able to deliver in the last years. To add to this and to conclude these operational highlights, when we annualize the profit of the second semester, we had the greatest level of our ROE in the history of the company, 33.5% growing in a very recurring way, and we continue seeing very positive perspectives for our operations from here on. When we look at the net operating -- net profit in the chart to the right, in the last 3 years, we multiplied this net profit in more than 4x, which is very positive in our view. And also lastly, I would like to highlight, we had a payment of BRL 347 million in dividends now in July, which basically means a payout of 100% over the net profit we had in the first half of this year. So we have somehow been one of the main payers of dividends here in the Brazilian exchange -- stock exchange when we analyze the payout and the yield. And our way of working, always trying to return capital to our shareholders. This is what we want to continue doing when we analyze the perspectives that we have for the future here in our company. Well, having gone through this initial part, now I would like to go to Page 5, where we address the launches and operational data in the company in the second quarter. We had an increment of launches. Once again –- we, once again, recomposed our inventory that had been dropping since the beginning of '24. So we had been selling more than launching. So our inventory level was dropping, which is very positive in a moment where the capital is very expensive. So in the second quarter, once again, we were able to have a number of launches over the number of sales, more than BRL 1 billion. So when we look at the first quarter as a whole, the second -- the first semester, we reached BRL 2 billion in launches, a 24% growth when compared to the first semester of '24. Riva represented 38% and Direcional 62%. Once again, with a broad analysis here that is important so that you can see what we've done in the last 4 years, launches grew more than 3.6x. They went from BRL 1.700 billion and reached almost BRL 6 billion in the last 12 months, closed now in June. And the next page, Page #6, in terms of net sales, this was a very positive quarter in terms of sales. We had a total of almost BRL 1.680 billion in net sales in the second quarter. It was an almost 12% growth related -- in relation to the second quarter last year. And when we analyze the first semester '25, we were more than BRL 3 billion and Riva was almost 39% of this total. Direcional, a little more than 61%. Once again, in the last 4.5 years, our sales grew almost fourfold, 3.8x, going from BRL 1.680 billion, and in the last 12 months, reaching BRL 6.3 billion. In Page #7, with regards to our VSO, our net sales speed, this second quarter, we presented a record net sales PO (sic) [ speed ]. It was over 26%. It reached 26.4%. Also, we've seen in this moment costs. They are very well controlled. And we haven't had a lot of impact in increase of costs in this moment. But we stress this, the capital is very expensive. So vis-a-vis this context, our priority continues being continuing growing the speed of sales so that we can deliver less capital in our operations and have less demand for working capital during this moment of growth of which we are going through. So net sales speed continues being a priority so that we can continue delivering this operational growth, a little demand for capital and return via dividends of this surplus capital to our shareholders. Having gone through these points now, I would like to give the floor to Paulo so that he can show us the main financial highlights of our operations. And then I will be at your disposal afterwards after Paulo so that we can then have our Q&A session. Thank you very much, everybody.

Thank you, Ricardo. Good morning, everybody. So I will -- now I will show you the financial highlights. Slide #9. To the left, we have the net revenue, and the highlight is a growth of 19%. It went more than BRL 1 billion in revenue for the quarter. And I think that the main point here are the works that are accelerating. Generally, we...

I'm sorry. Yes, your sound is very low. Please go -- speak louder, please.

So hang on a second. Yes, I will speak louder. Okay?

Yes, it's better.

Perfect. So now I will go back here and beginning with the left with the net revenue. Our net revenue in the quarter grew 19%. The main reason to stress here was the acceleration of the works. We began with a backlog margin which was very high. And it's important to stress, we never begin works in the rainy season. So the works launch began last year, and now, they begin to speed up. And now we will continue accelerating the works, and we still see revenue growth in higher levels. And with this, we exceeded BRL 1 billion in the history of our story, and we accumulated in the first quarter almost BRL 2 billion in revenue, BRL 1.959 billion. To the right, here this red bar, we can see the revenue of the SPEs where we have partners and that we don't consolidate in the results. So this shows the efforts, right? And so shows -- this adds to the operational information. So in the quarter, we reached BRL 2.556 billion in revenue. And we analyze this, we have exceeded BRL 5 million in deferred revenue. We are BRL 6.3 billion. And here, we still have BRL 5.1 billion in revenue, which shows us that we've got growth. We have growth in sales with already a contracted sales growth, and the idea is to continue selling and start with the works. So here, to stress what Ricardo said, we closed the quarter with a gross margin record, 41.7%. We want another BRL 20 billion with regards to the previous semester. One of the main drivers here is a strong demand and efficiency in cost management. So we can see we've gained efficiency here with regards to inflation in the last quarters, specifically considering our construction method and less exposures here, which has really led -- is one of the things that leads to inflation here. And this is one of the drivers here. In the semester, we grew BRL 400 billion in our gross margin when compared to the last -- to the semester last year, the first quarter. To the right, here we have the history of our revenue inventory. Deferred revenue, these are units that have already been sold, but haven't been built yet. There are works to be built so that we can have this revenue. And the revenue in our sector, just to remind you, it is received after the works are finished. So here, when we look at our deferred revenue, it grew almost BRL 3.4 billion. And this growth in the deferred revenue, since its inventory, the margin of new projects -- of new sales is well over the margin of the works we have been building, the old sales. So perhaps here, we can have -- we can see that the margin of our inventory is high because the backlog margin has grown and sales done here have margins above the previous margins. And I think this backlog margin plus the margin of new sales, more than the old ones, gives us the comfort that our gross margin continues at very high levels when we look at the next works as we receive the results. And on Slide #11, to talk about expenses, here to the left, you have the G&A expenses, another semester -- quarter with important dilutions. Our G&A went from 4.8% of the total revenue, the one I showed you 2 slides before, including the minority interest, it went to 4.3%. In terms of the semester, it went from 4.9% last year to 4.5%, comparing the 2 semesters. And this is where we -- it shows you just how carefully we look at our G&A expenses. We have to dilute expenses here. So we never ever lose focus here. And to the right, you have the selling expenses. There was no dilutions. Sales grew a little more than the revenue. And the reason, going back to the slide Ricardo presented, a growth in launches, it grew 24%. And when we grow launches, we increase selling expenses effort. We try to sell the product, right? So there are anticipated expenses here. So here, we're spending in the second Q anticipating the launches of the third Q. So this -- the main reason is this. And also it's important to highlight, last year, we began the year selling a lot of inventory. We launched less last year and sold more than the inventory. And the main change here that impacted things was to launch more in this first quarter -- than first quarter last year. And we have to continue working to dilute these expenses. There's a huge variable component, but there is a fixed part that we have to work with growth, reducing this percentage with regard to the revenue. Next slide. And now to talk to you about the net income. Here to the left, we have the blue bars, which is our net profit reported, which is the operational one -- the operating one. These are nonrecurring effects, right? And in the quarter, we reached a record of BRL 104 billion (sic) [ BRL 184 billion ], 17.2%, growing 36% compared to the previous year. So here, we continue with our trend, increasing net profit. In terms of the semester, BRL 342 billion and a net margin of 17.4%. In the red bar, we included the effect of minority interest in our results, the revenue of equity income and also the expenses of the minority interest. So the results of the revenue we consolidate. So this is the net impact, what we paid the minority group and what we received from nonconsolidated SPEs. And we tried to show you the growth here that went from the first Q '25 (sic) [ second Q '24] to the first Q '25 (sic) [ second Q '25 ]. So we increased Riva's participation here. And we already have a new partner there in Riva that has part of this result and is a minority interest. We are sure that it was a very good operation. And we showed you here to show this red line. This is an adjusted -- net margin adjusted because of this. When we consider this, our net margin became flat quarter-after-quarter with an important growth of more than 200 bps, basis points, compared to the previous years, going from 19.3% (sic) [ 16.9% ]to 16.9% (sic) [ 19.3% ]. So we did the –- we included this to show you that there wasn't a drop in net margin in the operational view. Our net margin was stable because of –- is stable because of this. And to the right here, I will draw your attention to the ROE curve, growing quarter-after-quarter. Our ROE reached the greatest level in our history, 33.5%, going from the first quarter '24 -- going from 24%, right, in the first quarter of '24. So here it's showing that we grow profit without increasing working count and paying dividends to our shareholders. Lastly, capital structure. This is very important. I always say our budget starts from here. This is where we decide upon size, dividend. We closed one more quarter with net cash, 5.6% net debt over the PL. We closed the quarter with the central chart with a record in cash, more than BRL 2 billion. And in the last chart, here, it is important to show you our very elongated schedule of our debt, very little debt. Every one of these bars, every 12 months when we compare to the cash we have -- I think the last bullet point in the slide here, since -- if this was a subsequent event, during July, we captured BRL 60 million in a very elongated debt with payment in 10 to 15 years. So this schedule we see here in the upper right chart is the closing of the second quarter. But already in the beginning of the third Q, we elongated even more of this debt, including another BRL 600 million in this window parting from 17 months -- 84. And elongating even more our debt so that we have more comfort to operate in these next quarters. Well, I think I have gone over the main highlights. So now I give the floor back to Andre, who will moderate our Q&A.

Thank you, Paulo, Ricardo. [Operator Instructions] Our first question, Fanny, Santander.

Well, I have 2 questions. The first one, when we look at the gross margin trend in Direcional, it is still very clear to see how you have been recovering margin -- the expansion of the backlog margin shows our attention, right? We know that the long-term margin is 36%. But I want to understand how we can expect a margin when we look at 18 months. Because I imagine this year, you are delivering -- you had a cost increase in '22 because of the war, right? And now the margin of the new sales is very strong. So I know it's difficult to give us a guidance with regards to the margin, but what do you think is feasible to expect here in the next months in terms of profitability? And this would be my first question. And the second question, I also want to know if you could give us a color with regards to provisioning levels and also with regard to the PDD you see in terms of default of the portfolio. These are my questions.

So I'm going -- Paulo, I'll tell you with regards to the first question, then you answer the second with regards to provisions. So we had a gross margin, which grew 0.2% reported. Going through the bank statements, adjustment of -- by income -- by rates, right, income rate, because we're trying to have the greatest amount of financing to production. So in the line here, from financing to production, the interest has an impact of almost 3 percentage points between the adjusted gross margin and the reported. But it has made sense to operate considering this kind of financing in this moment because of the fact that our debt -- the corporate debt coped is at levels above financing to production. And also, we saw the backlog margin, the deferred revenue growing. The rev went up at a speed above the reported based on an inventory of future revenue, which is over BRL 3 billion. So you have this increment here that shows us very clearly that we have commercialized our products and also we've been able to execute our works with very strong efficiency levels and we have been able to [ pricify ] our growth. So this growth of 0.8% of the backlog margin is very clear that gross -- future gross margin should remain in very solid levels, superior to what we have always tried to show to the market. This should be the recurring gross margin, right? It shouldn't be 38%, almost 39%. It should be more than -- although we are delivering margins above, more than [ 336% ] for some years. And when we return -- when we analyze return over capital, this 35%, 36% margin, specifically when we buy -- this would give us a return over the capital, and it's very important for our launches. So because 35% and 36% meets the needs of our hurdle, return hurdle, it is important to show to the market that this should converge to this level. Although -- and when we analyze the rev and the reported, I think it's very clear that we should operate with gross margin levels closer to what we have disclosed in the last 2 quarters for some period still, specifically because we have in our future revenues, 3 quarters at least of reported revenue in the statements of our accounts. So this gives us comfort, and we know that margins will remain solid for a reasonable time. So somehow -- this is what I would have to say at this moment. We continue seeing very controlled costs. We have been very conservative in the budget, in our budget, in our projects. We have operated with levels of cost increment below what we provision with future inflation perspective, specifically because in our construction process, representativeness of labor as a proportion of the works cost is lower. So it is specifically lower than the INCC. So our construction process where the weight of the labor is lower than the index, this increments the productivity of our professionals. And so when inflation comes from labor, we feel inflation lower than the index. Although, we still are in a very volatile world and Brazil is very volatile, we are comfortable with the margin levels we have been able to deliver, and this margin is very clear. So this is what we have the greatest visibility in this moment. So Paulo, I would like to give you the floor with regards to the provisions, which was Fanny's second question.

To talk about provisions and to begin with the managerial impact and default, it's a long story. We saw it drop a lot during the pandemic and then it grew at the end of '22 and '23. And now we have -- we've seen it being very stable in -- for many semesters now, many quarters now. But we've seen huge stability in the managerial way and specifically with the portfolio. And what we have seen here is that one of the factors that we adjust when we have an excess demand and things are going is credit. So we tightened things. And that, that we originate today, should and has to be better than the portfolio originated in the previous years. So when we conveyed this -- when we -- considering the accounting, we are okay in terms of provision. So when we look at the results, provisions tend to grow according to the growth of the portfolio. Our provisions grow together with the portfolio. And so for every new sale, you have a corresponding provision. So this provision, part of it goes through the line, the others, right? It's stressed -- it's highlighted in a very simple way. In the quarter-after-quarter provision, there was a growth very close to the growth of the portfolio. So I don't see any point of attention here.

Perfect, Paulo. Just a follow-up for Ricardo. What do you have in terms of savings here, accumulated savings here in terms of works? Could you share this with us?

Fanny, we have tried to work in our budget with the cost increment perspective close to the INCC around 7% a year. So we've had around 2% below this in our cost increment that we've seen in our daily activities. We avoid any budget adjustment. We wait to have comfort with the advance of works so that we can do this right. So I don't think there is a fixed number with regards to what this would be, this gain that we had with regards to the expected INCC. But in these years, 1.5 years, we've had a gain of 2%, which eventually will be reverted if this economy changes until we wait 70% of advance here with the works. But I think it is very early considering all the volatility issues with regards to tariffs and exchange rate. I think that we are going to work as assertive as possible with the variables we have in this moment. In this last 1.5 years, we have been able to operate in a way that is better than what the index has shown the market as a whole. When this becomes consistent and defined, then we will eventually be able to revert something. But it is precipitated to say this moment, because in the works where we were able to have this gain, haven't reached this level of 70% of advance.

Second comes from Pedro Lobato.

So here, we have 2 questions. The first one has to do with cash generation, right? There was an impact of the sale of Riva this quarter. So excluding this effect, we would like to see in terms of cash generation what was core business and what came from the sale of this portfolio and transfer, right? And the second question has to do with the size, how you imagine the launches, right? You have the second quarter. You're going into the -- so what we -- what do you imagine for this year, right? You're going to the third quarter -- second quarter.

Pedro, cash generation, we had BRL 395 million. A quick adjustment, when we -- I will show you what is nonrecurrent. There was interest of BRL 251 million with the sale of the stake of Riva, [ BRL 3.5 billion ] minus BRL 251 million. And when we look at the sale of portfolio in the second half, it was BRL 190 million, BRL 188 million. We can see this there. During the quarter, we transferred almost BRL 70 million of transfer to portfolio sold in the previous quarters. So the net was BRL 116 million. A complete math, BRL 395 million minus BRL 251 million Riva, minus BRL 116 million sale of portfolio, operational cash sale of between BRL 25 million and BRL 28 million in the quarter. So I think this was your question, right?

Yes, exactly, Paulo.

And to answer the second part of your question, Pedro, generally, in Direcional, we have a second Q, which is –- a second half which is stronger. And this year should be the same as long as our products remain relevant, as has always been. So we try to launch a lot in the first Q. And the fourth Q, specifically in October and November, we have the perspective to continue having more products in a consistent way, right? So we have an approval expectation which is higher in the second half. And depending on the demand, we will continue launching. So the second half tends to be stronger than the first, and it's recurrent here in traditional operations. Affordability, we see it very positive in this segment, specifically because we have -- more than 70% of our products are eligible to Minha Casa, Minha Vida program, eligible to the funding from the FGTS, specifically after Level 4, which picked the products of Riva. So we see a strong affordability and demand and job generation. And if we remain with this scenario, certainly, we will have a very positive launch pace in the second part of this year. We are optimistic with the operation and demand. We feel very positive with regards to cost. And if we remain with this higher net sales speed level, the perspective of cash generation is positive. So I think that if the scenario remains so -- in spite of the macro scenario being more difficult to read, when we look at the operation itself, we are very enthusiastic with the perspectives for the second Q.

Next question, Andre Mazini, Citi.

Another 2 questions. The first with the direct table year after year. So this increase has to do with Riva's operations, which is out of the program, because the SPE rate via the Caixa Economica increased this year. And with Level 4, this revenue should stabilize or even drop because -- and the second one, with Riva and the sale here that you concluded this year, we have until October for the buyer to decide whether we will go to 15%. What would be the trigger to get to 15%? Is it management funding -- fundraising from their part? Or is there more necessary for them to get to 15%?

So, Ricardo I will begin with the first part of the question. With regards to direct revenue, year-after-year, we saw a reduction of the origination of this direct portfolio. The point is there was a reduction of prepayment. This portfolio has a huge volume for the bank. But as you said, the increase in interest rates kind of discourages the customer here, and this allows this portfolio to increase. And also, this is a work - a portfolio, it's works plus 10 years. And since the company is growing a lot, this portfolio still hasn't stabilized. It will continue growing for some time. And in our vision, this is a normal natural movement. It is an asset that gave us protection against inflation. You can't only operate this transfer to the plant. It's our main sales policy. We encourage this, but also we like to have exposure with this asset so that we can have a correction of the accounts receivable and have a flow. And in general, this is something that we do. I don't know if this became clear for you. Ricardo, if you would like to comment.

Just to add to this, with regards to sales, direct table here, this has represented 20% of the total goods sold. So if we consider Riva and Direcional, the total amount where we have this funding via direct table and 20% is represented, this level hasn't grown. And we are not interested in having it grow, specifically in a moment where costs are controlled. We have tried to prioritize non-associative sales. However, this level, as Paulo said, 20% of sales occurring in a direct table model with fiduciary alienation, the fact that we have this credit corrected by the [ INCC ] and IPCA plus 12 with a longer duration than the execution of the works itself, gives us a very relevant hedge when compared to an eventual inflation spike. But we always have to be prepared for the scenario, right? We're not seeing this at this moment. So what -- this -- it grows. Duration is very long, but it doesn't mean we're originating more as a percentage of what we sell. So when we consider future inflation, we have this direct table portfolio, which has an important proportion and gives us an extra edge, specifically when we consider that this portfolio will be corrected to more 10 years. So this duration difference gives us this important hedge here when compared to an increase in inflation that might happen. And this is part of our strategy and part of our conservative way of working. Your second question, Riva. Originally, in April, there was an expansion that we would have an acquisition of a stake of 7.5%. BRL 200 million has already exceeded this 7.5% in the first tranche, 9.8%. It exceeded the expectation. So instead of having a liquidation of BRL 200 million, it went over BRL 200 million. And we have until October for them to exercise the remaining 5.8% with a payment of BRL 140 million more. This is up to them, to their -- whether they want. If it will be via fundraising or resources that they have, they will decide upon this. But we've seen Riva's operations performing really well, specifically with Level 4. So we have to wait. The main message is that we have a capital structure that is deleveraged. In our opinion, this was done in a way of generating value for the Direcional shareholder. This is a capital that wouldn't have use in our current operations because of the low leverage we have in the company. So most possibly, this will be a Board decision, but it is capital return to our shareholders somehow. So in our vision too, to have a partner with access to capital with a cost that is lower than the return we intend to deliver to the Direcional, to our shareholders, makes us very -- much more complete. Our company becomes more versatile. From a strategic point of view, partnership with Riva is very relevant, and we want to have this partner as close to us as possible with a 15% stake in case it's their will. So this partnership with a manager, a very qualified manager, where we've already had a long relationship with, gives us a strong versatility in a moment where capital is scarce and expensive. So a partners such as them makes us more complete. So from a financial point of view and strategic point of view, this is something that is very positive.

Gustavo Cambauva, BTG Pactual.

So I would like to ask with regards to the growth. Ricardo mentioned the second quarter considering the future here. I remember that in one moment or the other, you had greater -- specifically with the engineering with a long delivery cycle considering engineering and then program yourself for more growth. I'd like to understand how you see this issue today? And what the company is thinking in terms of launch volumes, number of units and work sites continuing with the midterm, right, '26, '27. So if you could put into context where opportunities are here, Riva, Direcional. So this would be good.