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

[interpreted] Good morning, everybody. Welcome to the earnings release of Direcional Engenharia regarding the third Q '25. Welcome, investors, market analysts, and all participants in this video conference. I'm Andre Damiano, IR in Direcional. Together with me are Ricardo Contijo, CEO, and Paulo Souza, CFO, and our presentation is destined to analysts and investors. We are going to show you the main financial highlights of the third Q ended, and then we will open for questions and answers. [Operator Instructions] Also, we're listening to the YouTube channel in Direcional, the link for the transmission is on our IR site, and also on our homepage. We have the link for the download of the material we're going to show you in this event. We are recording this presentation. And as always, we can give it to you on the IR site in the results center. And all material can be accessed on our IR site. So to begin here, the initial highlights, I will give the floor to Ricardo, our CEO.

[interpreted] Thank you, Andre. Good morning, everybody. It's a pleasure to be talking to you in this earnings release call with regard to the third Q '25. Well, in our vision, we are delivering once again, very consistent results following a continuous improvement sequence with regard to our operations and efficiency. In the third Q, we had the greatest level of launches in the history of the company. It was the best quarter in terms of net sales, greatest revenue, greatest net profit, and best ROI. So in fact, it's a quarter that makes us very, very happy with what we've been able to deliver. And in this long cycle, quarter after quarter, we see our strategy materializing into numbers. Also, I would like to use the moment to highlight the gross margin we delivered. For the first time, it was over 40%. When adjusted by rates, when we consider our SPEs on our projects, the gross margin exceeded 42%. So here, we are seeing the benefits of negotiation capacity that is even greater with our suppliers. So here, we have a construction process where the productivity of our labor is increased, and this has allowed us in a moment of a lack of labor, and where most cost increments come from labor, because we have a huge productivity in this process we have adopted since 2009. For more than 15 years, we have been able to maintain gains in terms of cost, capacity, and efficiency cost. So I would like to highlight this gross margin we delivered this quarter. When we consider 12 months, we had a gain of more than 3 percentage points of gross margin in a period of almost 1 year, which is very relevant in our business. Another very important positive indicator is our REF margin, and the results of the future also continue to grow. And in this quarter, it also reached a record of over 45%, 45.2%. It was a 0.3 percentage point growth compared to what we had in the second Q this year. And also today, we have an inventory of BRL 3.7 billion in terms of REF margin, so 16 to grow so much in 1 quarter demonstrates that sales have been done with margins that were much greater than the previous margins. Also, these are the ones that have the great -- the works go to future revenue and the margins have been very healthy, which is an indicator for what we can expect from future margins in a short period of time, considering the quarters that are to come. This third Q, we also delivered a net profit of BRL 230 million, 43% growth when compared to the third Q last year. The ROE, as I said, was a record 35% when we annualize the results of this quarter, and when we look at the chart to the right, we can see that in 3 years, we doubled the net margin. It went from 8.7% and now it is 17.6%, slightly more than double, so this clearly demonstrates that the scale we have been able to gain in time has translated into the gains of gross margin and benefits of operational leverage. We have a reduction of expenses, which allowed us to have a growth of net margin, which was over the gross margin, and this makes it clear that the growth has given us greater competitiveness and more benefits. As long as there is demand and we continue constructing commercialized units, growth generates value and makes sense. And we've been able to show that quarter after quarter, this growth has been sustainable. We are competitive, and we have been able to benefit from this. Well, another important item to highlight because the third quarter, there was already a partial sale of the Riva subsidiary operations, and we had a growth in the line of minority industry. If we consider this minority, we reached BRL 218 million in the quarter. Since we consolidated the total revenue, and the minority stake of the partners, and to see the efficiency of the rotation, it makes sense to add the profit corresponding to the stake of this minority to the profit of Direcional, which reached BRL 258 million, allowing our net margin considering the stake of this minority over 22.3% this quarter. So it demonstrates what I wanted to say with regards to the benefits of this greater scale that we have operated with, and it has been very positive for the company. Also, I would like to add that in October, the first month of the fourth Q, the total sale of what had been agreed upon at the end of the last year with GSA was concluded. They acquired an additional stake. They had the right to acquire it. So 15% of the stake of the company. Direcional continues with 85%. And based on this 15%, we received in the second quarter until now, October, BRL 416 million. So it's important to remember that we still have things to do. Lastly, also here with regards to our highlights, I'd like to stress the robust cash generation we had this year in the first 9 months, almost BRL 500 million. Third Q cash generation, BRL 130 million. And even after paying BRL 350 million in dividends at the beginning of the third Q, we closed the quarter with extremely low leverage, reaching 3.8% in terms of net debt over the net equity. So slightly over BRL 100 million. So very, very deleveraged operation, which is extremely positive in this moment where capital cost is high, where we need to work in a very conservative way. So we have maintained our conservatism, and also in a moment where we have this discussion on eventual taxes on income parting from next year and dividends that would be taxed, those shareholders that receive more than BRL 50,000 a year, BRL 600,000 a year. So this low leverage gives us a very flexible position to define what to do with regard to this when we consider this period we have to the end of the year. Now to Page 5. In terms of launches, we launched BRL 2.152 billion. We grew 54% compared to last year. In the first 9 months of this year, our launches reached almost BRL 5 billion, growing 33% in relation to the first 9 months last year. It's interesting to analyze here to the right that from 2020 to '25, we multiplied this company almost 4x, 3.9x in total amount of launches. Well, now going to Page 6 with regards to sales. In this third Q, net sales reached BRL 1.642 billion. And it's important to stress that the share of operational grew in an important way this quarter. When we look at the Direcional share, it was a record in terms of sales, although the sales in the third Q compared to the second had a slight reduction. But when we look at the Direcional share, the growth was 11% in the third Q compared to the second quarter and 16% when we compare the third Q this year to the third Q last year. When we consolidate the first 9 months of '25, sales were over BRL 4.600 billion, almost BRL 4.650 billion, and here growth was 5%. And when we look at the Direcional shares, the growth was 9.1% when comparing the first 9 months of this year compared to the first 9 months in '24. Now I want to give the floor to Paulo for the main financial highlights, and I will be at your disposal then for questions and answers afterwards.

Thank you, Ricardo, for the presentation to continue, and with financial results and beginning here with revenue and aligned with what Ricardo said, and also the works ongoing in the third Q, our revenue grew 9% compared to the previous quarter, almost BRL 1.2 billion, going from 27% compared to the third Q '24. And with this, we accumulated a 29% growth in the year, reaching BRL 3 billion in revenue compared to 400 million last year. Here to the right, here in this red bar, our accounting revenue, SPEs that we do not consolidate in the results. We see in 9 months, we reached BRL 4 billion, and when we compare to the number of launches, Ricardo just mentioned, we launched almost BRL 5 billion in the period, a little more than BRL 5 billion, so this indicates that we still have a catch-up to make in terms of the launches, almost 25% catch-up. So we still have a growth journey in revenue and results, also, and with this, try to go after dilutions in the next quarters. So, to continue, now going to gross margin, we closed the quarter with 41.1% gross margin. And it was very complicated because of market past price transfers and because of the scenarios. And also, we had the macro scenario helping with inflation and everything relatively controlled, so we closed the year with 41.8%, almost 4 percentage points of margin year after year. To the right, we closed the third Q with almost BRL 4 billion in revenue, almost the whole month that we had, the rev margin. And it's important that the rev margin, the growth of rev margin means that we are selling products that are entering and they're greater than what is leaving, so here, it's a solid gross margin. In the short term, they will remain close to the levels we're delivering now, and we see a scaling quarter after quarter, a growth of the rev margin, still with growth this quarter, and this is a very positive scenario. And now going to the net profit, our net profit, adjusted for nonrecurring effects, the accounting was BRL 230 million, and the result is BRL 205 million, so we're removing BRL 25 million of nonrecurrent results in this second quarter. Here, in order to show you in numbers what Ricardo said, we have the effect of the minority stake in our business. This red bar is the net impact of the results of FTEs that we have here with partners, so here, we are removing the minority stake and the equity income here from our results. And here, we see an important growth, with less dilution of this line. In the upper part of the chart, where we have the margin, although the accounting net margin, which is the blue line, was 600 compared to the last Q of 5 bps, bps is right, when we look at the red margin, the gross, the net margin, discounting the minority effect, this is the profit of the business. So we're removing the effect of the stake of our project. Our net profit grew a lot. It went from 17.7% to 20.9% gain in gross margin. And in the 9 months, 17.1% to 19.9%. So this is the net margin of the business, and we should look at our operations here, a net margin of almost 20% in 9 months and '21, when I look at the semester. So it is a very expressive result. To the right, we have the quarterly evolution. The margin goes from 16.5% in '24, reaching 29% in the third Q '25. And the brown line is the ROE, and here, considering our profit over our equity, net equity, we reached 35.2% in return, a strong scale in these last quarters. The first quarter of '24 was close to 25%. So it was almost 10 percentage points, and it's important to say that everything is deleveraged and this return came from results, not leverage of the balance sheet. So this is an important point and a reflection of the work we've been doing here. Now, going to the next page, the last pie here before we go to Q&A. This is a capital structure. So here, all the discussion here, this is a quarter where we worked to reinforce our balance. We maintained the company's deleverage very low, 3.8% when we see the first chart to the left. And we worked in these last months to increase the cash volume. Here in the middle chart, we see that 1 year ago, our cash was BRL 1.5 billion, and we closed the cash with almost BRL 2.5 billion now in the third Q. Also, we're working here trying to stretch our debt. It has the longest term in the sector, 67 months, and the cash reinforcement captured from the market, a long debt. And with this, we have been able to reinforce even more our capital structure. So a lot of cash, long debt, everything deleveraged gives us enormous comfort to be able to continue with our business without the balance being something that we have to concern ourselves with. So it is the maintenance of our portfolio. Those of you who have been with us for many years, you can see that we have always worked in this way, and there's no hint that we're going to change this. So now I will go back to Andre for the Q&A session, and we are available for your answers.

Thank you, Paulo, Ricardo, for the presentation. So we will begin now with our Q&A. Fanny...

Congratulations on the results. I have a question. What draws my attention is the improvement you presented in gross margin in this third Q, which already came from a very strong base. You had expanded the margin, and now you presented a very expressive margin. My question here there are some government measures that might help you increase the margin, for example, the change of the subsidy curve that will help you in a state where you have important representation of sales in the Amazon. So I want to understand your mindset with regard to the balance between gross margin and DSO, net sales bill. Would it make sense to wait to forgo expanding margin because we have a positive scenario for costs in order to try to speed up these net sales? So that was my question. How are you with this balance between net sales and margin?

Fanny, I'm going to tell you about the changes approved the day before yesterday. These are very positive changes. And I think here, these changes, these adjustments that are very consistent, always considering the sustainability of the FGTS, are very positive. Clearly, the North region at this moment had a strong focus where subsidy curves not only went towards the right, but also increased the average subsidy. And in the North region, there was an increment of BRL 10,000. No doubt, we have important operations in Manaus. And certainly, we have a volume of families included in the market where we will be able to meet their needs. And when you see our REF margin growing, this is an important indicator for future gross margin. We always say this moment, our priority is turnover, sales speed, and net sales. So we had an important increase in launches this quarter. And this is in the quarter where launches grow, you have a smaller period, a shorter period to sell recent launches because they can occur during the quarter, not exactly in the first month. So launches that happened in the first month of the quarter have a shorter period to be sold. So there is an impact of the VSO here. But here, our priority is sales speed to have a greater amount of families buying and not margin gain. The main point here, and where we believe we will be able to extract the best value, is in the working capital.

So today, can you tell us the areas where you would be able to work to improve the net sales speed?

I think, Fanny, there are some places where we see opportunities here. Once we gain scale in these areas, as well as having a greater negotiation capacity with suppliers, which translates into more competitive construction costs and the gross margin, we also notice we see net sales there. We will have a well-known brand. We have more products to offer to the client. So we have a greater conversion into sales here. So the areas where we have less mature operations, certainly, there are net sales speed gains opportunities, like in the Northeast, Recife, Salvador, this is very clear. And I believe that in Rio, there is an important work to be done here, where we see net sales speed gains at this moment. So I would mention these 3 areas where we see the gains in net sales speed. But this is not from one day to the other; specifically in the Northeast, where we have a long path, a long journey before us, and products being offered simultaneously for potential buyers, this happens gradually. In Rio, which is an operation where we've been working more time, we have a perspective of gain in a shorter period when we do the right work.

Next one, Andre Mazini, Citi.

Well, my first question is, if you could tell us about the transaction results? Do you expect to have more events of this type in terms of the minority interest and the disclosure of Riva. We see that the ROE of Riva when we analyze the grid is 71%, which is very high and greater than the consolidated of Direcional. So what are the main reasons for this being greater in Riva? Would it be the purchase of land or working capital? And if we can see the demonstrations of Riva, can it be independent in Direcional, maintaining this ROE and net margin? So, if you were to separate things, would the demonstration results grow here?

Well, Paulo, will you tell us about the nonrecurrent events, new sales in terms of scale? And then I will add to another point here.

Mazini. This is a nonrecurring effect, but this is a sale of shares that we do of SPEs, the corporate. This happens with some interest. So these are SPEs where we have capital invested. And after the approval and feasibility of the project is approved, we try to have an investor who has a lower capital cost than ours to carry this invested capital. We continue capturing results from the SP, but at a lower scale, and we go together with this investor; we carry the capital. And the result is we do a DCF of the result. We capture an important part of this result and have positive results, and we classify this as nonrecurring. In the pipeline, obviously, there are opportunities and possibilities. We always work with this vision. For example, if we have a good business to do, we will do it, and it might continue happening. But I wouldn't have this as something that is fixed with regard to Riva. Tell us about the ROE.

So we have the information, and our intention is to open some story. We should have this on our site. We are preparing this, and I think those of you who want to consider Riva separately, we will give you information on this. And Riva has been able to operate with greater efficiency. The Level 4 has grown, and a fast net sales fee has to do what Fanny asked: net sales speed versus margin. Riva is in the best of both scenarios, high gross margin and high net sales speed. Riva was over 27% in the last quarter. So we have this benefit. And also, we have the benefit of the balance of Direcional helping generate efficiency for the balance of Riva. Of course, it's in a growth cycle. When there is expressive growth. The return is high. You have less portfolio. The return at the beginning of the project is always greater than the end, but this adjustment is small. Most of this return comes from the efficiency, high margin, and high net sales speed. To add to this, no doubt the fact that we have work execution and engineering being done together, Riva Direcional gives us synergy. So it is very positive to have a work execution structure of Direcional and the support for this project, supplies, and safety, where Direcional is doing these Riva works. So this is positive for the company with greater scale, greater negotiation capacity, and greater gains. Also, it's important to remember that in the first 2 years, what Direcional demands from Riva rates are greater. So we have 2 years of Riva with this benefit. But this is it. Riva's operations are very solid. There are benefits in the Level 4 products, partly launched, and the other part is in the end phase of approval. So here, we had the possibility of using Direcional balances. When we have this, it has operated with a fantastic ROE, 75% of this business. So no doubt, we have generated value for our shareholders in the operation of this subsidiary that has performed really, really well.

Next question, Carla Peyrelongue, BofA Securities.

I have 2 here. So the first one about the Level 4, you just said that the Riva results have grown because of this. Could you tell us about how you see the absorption of Level 4, the stake of this level in the current mix? How do you see space to expand this in the next quarters?  Second question, cash generation. So if we adjust cash burn from SPEs, you end up burning cash in the quarter. Part of this comes from the change from cash and some kind of delay in transfers. But I'd like to understand how you understand cash burn in the next quarters, specifically for '26. Is there going to be a greater convergence with net profit? Or do we have adjustments from here on?

Carla, I'll start with your first part of the question. Level 4, no doubt for us has had a large representativeness. Riva, when it was created in 2020, it used to operate out of Minha Casa Minha Vida. In '23, with an increase in the cap, which went from 264 to 250, part of the Riva products began to be eligible for the program, more than 30%. And now with the increase of BRL 350,000 to BRL 500,000, most Riva products have become eligible for Level 4 as long as the buyer's family is below BRL 12,000.  Of course, in this moment of a greater funding scarcity because of higher interest rates out of the Minha Casa Minha Vida program, we have aimed to have products in the Riva segment that have a ticket below BRL 500,000 so that we can always offer to the potential buyer Level 4 conditions of the program, which are very interesting, not because of the lower interest rate, but because of the amortization system. So we have tried to have most products, right, eligible for the program, and this makes an important difference in our net sales speed.  I believe that if we continue having this strong demand, as we have noticed, it is natural for us to continue offering products considering the future. So, I think our priority is to construct solid priorities. We have no way to build inventory where the capital cost is high. We always have stress that our priority is sales speed. And here, as long as there is a high absorption of this kind of product, we're going to try to prioritize launches of this product so that this growth can happen in a solid and healthy way. So let us see the behavior of demand, the conditions of the program, and how they will work so that we have greater visibility. But the expectation is positive for Level 4.  Cash burn. We had operational cash generation, Carla. I don't know the calculation of the cash burn, but we always consider every dollar received from previous portfolios. We also discount everything we had in terms of cash generation from the sale of assets, which is the stake of future generations, but the market discounts. And we had a cash generation of BRL 40 million this quarter. Obviously, the change in the way of payment of cash, and also in keeping with what the banks in the market do, which means just paying the amount corresponding to the amount financed by the customer after it went from the registry office.  Before they would begin paying from the contract, and it would become unlocked after the registry. But now, with the payment only after the registry office, during this transition period until we wait for the stabilization, there has been a cash burn. And in our case, in Direcional, BRL 150 million. But it's part of the process. It is clear. Obviously, there is an impact, but I think no way this has jeopardized the operations.

With regards to a recurrent cash burn and how we see cash generation compared to the profit, could you comment on this, too?

Thank you for the answer. Well, this is what I wanted to say. Our calculations here, when we move the nonrecurrent effect and when we look at the cash generation, the cash effect last quarter was close to 30, and this was almost 50. So I've talked about this. Our business is quarter after quarter, we have seen cash oscillations, but it is positive, even month after month. Sometimes it burns more; other months, it generates more. So there is some volatility, but it's always very positive, and that's the trend. So if we can use this strategy mentioned by Ricardo, focusing on net sales and working capital. Once you do this, things increase. And even in a moment of growth, it's probable for us to grow here.

And lastly, you mentioned about transfers. And I don't know if you were referring to the programs of the state.

Yes, we have an impact in the North region, in the Midwest, and also in the Northeast, but we don't report this as nonoperational. It belongs to our business. There are always challenges for us to solve here. Programs are fantastic, and we want them to continue. We believe that this additional effort in the states generates a value even if it takes longer. We sell faster. And transfer takes longer, but we reduce the pro-solute.  When we have fiscal benefits, it might take longer, and there might be an impact on cash generation in the year. If we put this in numbers, it's not small, it's relevant, but we're not considering this as nonrecurrent. And yes, we certainly had an impact, not only this quarter, but this year, almost this whole year. This business improved and worsened, improved and worsened during the year. The net here, we should have generated more cash. If the program were going at the same speed, it would be transferring at the same speed as normal. But certainly, we want to continue in the program.

Carlos, just a correction. Carlos is from Bank of America, not UBS. Next question, Pedro  Lobato from Bradesco.

I have 2 questions here, too. The first one, Direcional presented a concentration of launches at the end of the quarter. They had slight problems with the net sales. So I want to see the evolution of these sales in October, beginning of November. And the second is the dividend perspective from here to the end of the year, and also an idea for '26. Do you imagine some level of dividends for next year, too?

Well, Pedro, with regards to sales, we have noticed a program that has performed well. We still have a solid demand. This was a quarter that ended up being shorter because of the Christmas period in December and New Year's. So in fact, we have to work to have most products launched by the end of November.  We have noticed a positive performance. And always the question point here is the impact of the period of festivities, and this reduction of the time we have to commercialize the units. Parting from 15, 20 December, we noticed the market really cooling down. So everything is performing as usual, but the point is to see the end of the quarter.  And with regards to dividends, Pedro, we've had some discussions. We had a law that was approved by the Senate, where there's going to be a tax on the sale of people going, and in practice, people who have a strong level of dividends. Here, in the process of approval of this law, a guarantee was given that dividends declared in '25 wouldn't be taxed. This would happen from '26 because we have a profit reserve that is significant. I believe what is fair here is that this reserve should not be taxed, or there is very little tax. So we see what we're going to do here in order to have our shareholders benefit from this, which was given with regard to the dividends of '25. We are analyzing things now.  We want to be conservative here with regard to capital structure. But somehow, we believe we are prepared for this reality when we consider our cash position and low leverage below the optimum level in terms of what we believe is more optimized from the point of view of leverage. So here, we have a certain flexibility with this decision. There are some discussions occurring. The new law of the corporations and the new bill are being approved, but we are going to try to minimize the impact on our shareholders with regard to the profit reserves we have. And we believe that by '25, the taxes will be exempt. But we continue being conservative, and this decision should be taken by the end of the exercise, which is the period we have for this. Thank you very much, Ricardo.

Thank you very much, Pedro. Question, Gustavo Cambauva.

So, I want to ask a question here with regards to growth. You are going to deliver another year here in '26 with good growth of launches and sales. My question, Ricardo has always mentioned that the challenges of engineering are with the sales team. But when we look at your balance, everything seems to be very well equalized. So, how do you see the possibility of growing more if there is a level that you are already aiming for in '26?

Thank you for your question. Well, we have noticed that our growth has given us competitiveness with gains of gross margin and, greatest operational leverage. We have become more competitive, more efficient. So, I think it's important to say that we have been able to grow, maintaining our operations under control, and even with the lack of labor that we have in the country because of low unemployment rates. And this is positive. The buyer of our project is a person who has to have income. So, it's positive when we look at the market we serve, and the main point of attention in this growth program is the availability of qualified and trained labor to maintain productivity levels that we have in our business. And also, we've noticed that our growth has been very healthy and sustainable. So, from the point of view of land banks, we have a huge land bank, and with sales speed, that is, we have sales there. It's interesting that it allows us to give this with the least demand for working capital. And that's why it's important to have high net sales between launch and the beginning of works so that works can begin with a certain amount of units already sold, where we minimize our cash exposure. And here, I see that our execution is doing really well. Once again, growth is not our priority at this moment. Our priority is continuity, where we increment ROE, where we continue growing returning capital to our shareholders, where our book has the lowest growth, even when we see revenue and profit growing. And this is what has allowed ROE to have the best performance quarter after quarter. So, if we have demand and net sales speed and deliver this growth with the least demand per working capital, we can continue growing gradually.  But once again, it's not a priority. Priority is sales speed, and depending on what we find in terms of demand. The comfort in terms of execution capacity, I would say, is greater than a year ago, Cambauva. So, I think this is the scenario.