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

Good morning, everybody. Welcome to our earnings presentation of the Second Q '26. We hear from Direcional Engenharia. We would like to welcome our investors, market analysts and also all the other participants in this earnings presentation. I'm here with Ricardo Gontijo, CEO; and Paulo Sousa, CFO and Investor Relations Director. We have our initial considerations and the main highlights of the quarter. And then afterwards, we will open for questions. [Operator Instructions] We are recording this event so that we can put it in our results center. Now, I would like to give the word to Ricardo for his main highlights.

Good morning, everybody. Once again, thank you very much for everybody's participation here in our earnings results conference presentation with regards to second Q '26. I want to begin with Page 3, where we're going to have some highlights I find very important to share and stress with you. So in this first -- Page 3, in the last years and also the last 12 months closed in June now, an increasing volume of launches and gross sales and net sales. And in the last 12 months closed in June, we reached more than BRL 7 billion in launches, we reached more than BRL 7 billion and net sales when we consider the cancellations over almost BRL 7.4 billion. I would like to stress that we still see a strong demand for our products, and it is clear in the amount of gross sales we had. However, on the other hand, it is important to stress that in the last 3 months, we had more cancellations than usual in our company. And this is because of the problem with some budgets that state government had to increment subsidies coming from FGTS in the Minha Casa, Minha Vida program. These subsidies added to FGTS ended. So we had an important volume of sales done considering the continuity of state programs that unfortunately don't exist anymore. And for these sales, now we're having to cancel the units. So I would say that in the first quarter this year, the amount of cancellations, no doubt has been much greater than the amount of cancellations in the future. But certainly, we have been impacted by these state programs that were stopped. So when considering the future, most probably -- most problem, the difference between net sales and gross sales will decrease, and we will have a lower impact in our revenues because of these cancellations. And in the following semesters, all the units that can be canceled will have been canceled. Thus, we will have a less negative impact in our results from there on. Page 4, still with regards to our highlights that I would like to stress with you. In the chart to the left, we try to show the net -- the effective net margin of our operation. Of course, this is not the results for Direcional specifically, but it shows our vision with regards to the efficiency of the company's operation, specifically after the sale of a minority interest we had in Riva in the end of '24. The minority interest line of the company grew. So we consolidate Riva's revenue as a whole and the share of these partners is in the minority line as well as other projects where we have partners, and we consolidated the revenue. And then the minority interest shows the share they have in the profit of the project. This reduces the net margin of the revenue because we consolidate and then we have the profit only considering our stake. When we exclude the effect of this minority line and the equity income line and we consolidate 100% of the revenue of all projects we have a stake and also consolidate 100% of the profit, we noticed that in the last 12 months, closed in June, we reached the greatest level of net margin. What I want to say here is that we have been able to benefit ourselves operating with greater scale, greater volume, and this has reflected in the greater -- the greatest gross margin level in the company. And on the other hand, because of this greater scale, we have also benefited from having operational leverage where we have been able to reduce G&A expenses, which is very clear in the material we're going to show you now when Paulo shows you. But this has been important for us to deliver a solid net margin. In our view, this ends up being an interest barrier for eventual other players, the level of efficiency we've been able to work with and capacity of negotiations with suppliers because of the scale we've worked in this moment. When we consider the chart, the ones in the middle and the right, considering cash generation, we noticed we've had an important cash generation this first half of the year. And after paying in December last year, more than BRL 800 million, naturally, we should spend the rest of the year with a deleveraging program. At the end of the second quarter this year, our level has fallen below 25%, has gone back to the recurrent levered margins in the last years, 13%, 15%, 20%. So we are already in the levels we work with -- within the levels we work with. And also in the following page, Page 5, we tried to demonstrate to you in an even more stratified way month by month as an important part of the cash that we have. This means how much we received because of the advance of our works here in the model we work with most of our projects. So when we address cash generation, which is the priority of the company this month and has been in the last quarters, where capital is expensive in our country, the prioritization of cash generation is for us the lever where we're going to extract the best value for our shareholders. When we notice the cash generation in the first half and second -- the first and second quarter, the operational cash generation, and we assess and show month by month how much has been paid within the associative model. This does not -- this data does not consider what we received from sales [ direct ] in pró-soluto. This is only what is paid for us by Caixa Economica Federal because of the advance of works. We see that June had been the best month in the year, where for the first time, we exceeded BRL 300 million. And in July, we had 30% growth related to June, reaching almost BRL 400 million in receivables. So there is a prioritization of cash generation. This has been one of the variables that the market has come -- tried to understand and analyze. And we're here showing you very clearly that there is a strong continuity perspective of cash generation, seeing that June was fantastic here. So we are showing to you the expectation of continuity of deleveraging of the company with a potential return -- returning non-used capital to our shareholders in the future. This is what we have been doing in the last years, considering the fact that last year, we had a yield when we analyze dividends, the high double digits, right, yield. So we still continue here in this path, and we have tried to prioritize cash generation and consequent return of capital -- non-necessary capital in our operations to our shareholders, also being -- always being very conservative in leverage, right? Because we believe it's very important and very -- it's prudent to do this because of so many definitions in the national scenario and global scenario. But the resilience of our business is very clear with what we're delivering this quarter in terms of margin, volume, where we are one of the few companies that delivered sales growth in the second quarter compared to the first quarter. Growth of recurrent profit because we had this effect of BRL 13 billion coming from the sale of SPA stakes. And so when we exclude this, the profit of the second quarter was more than the first quarter. So we consider being very consistent one semester after the other and our work is very clear. You can see the results. So Page 7, in the second quarter, we had launches over BRL 2 billion, a more than 100% growth when compared to the third Q of the year. And when we analyze the first half of this year compared to the first half of last year, we had a 9% growth of launches, having exceeded BRL 3 billion in launches. When we consider the demand and the projects to be approved, I would say that the demand being solid, noticing in spite of a very strong impact in the end of June and also beginning of July, we already noticed an increase in sales volume in the end of July and beginning of August. And since we had -- since the first quarter is seasonally weaker in our sector, the demand being solid, we're having projects to be approved, which will lead us to have a strong level of pace of launches. What is going to guide our launches are sales. So the VSO index net sales speed is what's going to leverage this in the second half. Net sales, the chart to the right, we exceeded BRL 3.8 billion in the first Q this year, a growth of 8% relative to last year in keeping with our amount of launches. And here, in terms of sales and launches, I'd like to highlight that we have noticed a return to the normality of the demand of our products in the second fortnight of July towards. We had an impact because of the World Cup and some other local holidays in Nordeste, in Manaus, Amazonas, we had Parintins in the end of June. So we noticed an impact in the sales in June, which seems to be coming back to normal now. Page 8 with regards to our VSO. It was 23% in the second half this year, in keeping with what we had in the first Q, a net sales speed of 24%. And I'd like to stress until mid-June, our VSO was superior to 25%. But because of the impact I just mentioned now in the end of June, we ended up have a sales volume in the second quarter -- second 2 weeks of quarter lower than what we were selling in April and May. So the impact in the end of June lowered our sales and resulted in a net sales peak in keeping with the first Q, but there was an expectation of exceeding 25% VSO, but it wasn't possible because of the events we had in the second quarter. Page 9, an important information we'd like to share with you. I said in the beginning of my presentation that we are seasonally having more -- higher cancellations than we believe is the recurrent volume of cancellations in our business compared to it, right? And each state we worked in, we tried to see how much we resold of those units canceled in the first quarter. Manaus is where we had the greatest amount of cancellations. We canceled more than 600 units in Manaus and the demand for these units, these canceled units has been strong. And in Manaus, we have sold more than 95% of everything canceled. Of course, we would like to be selling new units and seeing positive impacts in our revenue, dilution of our expenses. However, because of the scenario of cancellations, the resale of these units is very positive. It is not the best scenarios we would like to be in, right? We wanted to sell new units, but these cancellations haven't been a problem. Obviously, we have an impact in revenues. We have postponement of cash generation because these units since there wasn't any -- because of a lack of state programs, right, we have a new sale, new credit approval, new transfer. So cash generation is canceled when there are -- is delayed because of these cancels -- cancellations, but it's good. Now, I'm going to give the word to Paulo for the main financial highlights. And then I will be at your disposal for questions and answers.

Thank you, Ricardo. Thank you, everybody, for your participation. It is good to be here one more quarter. And to begin here with financial results, the revenue, as Ricardo said, there was an evolution of works, projects and we were able to have 14% of the revenue compared to the first Q -- the second Q '25 and we grew 11%, and we grew 19%. And the blue bar is were the revenue where we extract most of our results with growing 25%. And this month, considering a greater amount of cancellations and postponement of revenue and resale of units, canceling, reselling, and we were selling new units, we would have more revenue. But here, we had a quarter with evolution of work. Here, the maintenance of the gross margin from 42.9% to 42.8%, right, the greatest level of gross margin in our story. So we are at 42.9%, almost 43%, at a growth of more than 100 bps compared to the last quarter -- last half -- last year. So we had a good sales performance and the sales of inventory. And I will tell you about our inventory margin, which is still very high. And already here to the right, where we have the deferred revenue. And here, in a very summarized way, these are the units sold and not constructed yet, not filled. Once the works evolve, we defer the revenue, and we have a rev margin of 43.9% and the change in margin between 25% to now, the 25% is related to the harvest. The products we launched in these last quarters, specifically in the second Q, we sold a lot. We're selling our launches really well and launches also begin with lower level margins, lower margin levels. Once we gain in price, if we get inflation right, our margin grows, right? The trend here is to have an inventory margin greater than the deferred revenue. It's more than BRL 100 billion over the deferred revenue. And this has been the reason for this. And the once in our revenue, once we raise prices, we can have margin gains. It is important to stress, this is not our priority. Our priority is sales and cash generation. But every time we see room for this, we try to have margin gains in our products and considering the demand, we always are able to have a little -- a few more gains, right? Page 12, expenses. This first, we have the trade expenses, a growth of 25% -- 20% compared to last year. First, a huge -- a very big volume of launches. We had double what we launched in the first Q -- in this first Q -- the second Q. And as mentioned by Ricardo, the volume of cancellations and the impact we had in sales in the end of the quarter, for example, because of our material of communication, material publicity, we had a lesser dilution below the expected. And because of this, our commercial expenses -- selling expenses over the revenue reached 10.1% and this is national. Perhaps this quarter with more intensity than others, specifically impacted by cancellations, but we're working to recover the dilution in the selling expenses. The first half, 33% growth, 9.7% of sales, but impacted with the lower amount sold in the end of the quarter and also because of cancellations. General and administrative expenses compared to the last quarter, we had a slight decrease in the last quarter -- the first quarter, we had a greater amount of PLR and also at the actions plans -- the plans we have here and consolidated in the first quarter and the second quarter, there was a decrease. It's not natural to have reductions of G&A in operations that are growing, but we have been able and this level we delivered now is healthy, and we will continue with growth here. Next slide. This is the consolidated of the space we considered. In '21, the SG&A track record represented a little more than 18% of our revenue. And now since '24, we're going between 14%, 15% and 16% and reaching 15.6%. So once again, if we were -- if we are able to recover sales that were left at the table in the end of last quarter, we would have had an important dilution here, maintaining the greater efficiency levels we've already seen here. Lastly, and as a result of everything, EBITDA and net income. In the EBITDA, we see a strong consistency in the last quarter and eventual oscillation between expenses, but a reduction of the gross margin. And this allows us to have a healthy EBITDA, a small reduction of 100 bps, right? But perhaps there was a need for revenue, but the rest is balanced. And we're working to accomplish this in the next years. This will come from sales, which is our main priority. To the right, the profit, we delivered in keeping with the -- we delivered BRL 237 million in profit and a gross margin 15.8% compared to the previous semesters because of the smaller dilution we had in the last slides, still, we have very healthy levels. And in our view, there is room to recover what we delivered in the last -- the previous semesters. Capital structure. We are working here. And as we've been doing recurrently every quarter, raising the leverage to levels below 20%. We began the year with 23%, and now we are 18% considering the cash generation we had in this last period. And we want to generate the most amount of cash to be able to -- when we do it below 15%, 10%, we pay dividends, always considering focus on this capital structure. All our discussions part from here, our size, our growth, where we go to, we begin with capital structure. And also, it's important to highlight this important cash volume. We have almost BRL 2.5 billion of cash. This is a historical level. We -- and we really -- our debt is the longest in the sector, 65 months of average term, right? So here, we have linearity almost every year, almost a lot of cash, very little leverage and a strong large period -- payback period. So this is one more positive point for us to continue with our operations. Well, I think I've gone very quickly here so that we can go to the Q&A, which is the most important part of the call, and we are here at your disposal to answer questions.

So now to begin with our Q&A and so that we have time for all the questions. Our first question comes from XP, Ygor Altero.

Two points here. First, we want to understand what affected sales. Was it because of the World Cup? We saw some players complaining about Riva, too. You didn't hear my question?

Well, I can hear.

Okay. This is the sales dynamic. We had -- we saw problems from cash in June, greater restriction, right, from Caixa. Was it because of the top? Or do you already see the situation more normalized? So with regards to Minha Casa, Minha Vida agenda, is there space for more improvements this year? What we can expect from improvement, how this can benefit Direcional?

Yes, very clear, your question. Thank you very much for your questions. We had a specific event from Caixa that began on the 27th June and lasted to 10 July. It was a change. With regards to the percentage of the income that can be compromised with the placement of the installment of the financing. I don't know what happened there. This reduction in the income percentage because of the payment of the PMT of the launch had a significant impact in our sales. So in the end of June, all the way to 10 July, but we noticed now in July, a strong reduction for demand of property starting from the 15th. So this adjustment of the cash that happened, it was very specific issue. This impacted things. But I would say that perhaps it was because of the World Cup because last year, we also had holidays in the Northeast, right? So what was more special this year related to last year was the Cup. So parting from mid-June, we noticed a reduction in the demand for property in our site and contact with us. And also in the end of June, we had the impact of cash. In practice, it happened in the end of July because it was the first 10 days of the month. But this has gone back to normal, and there's no more impact here. But we noticed Caixa very cautious in the credit analysis of clients. And I believe that this is very positive. This demonstrates the bank's technical part. It is a bank that works technically and doesn't have any kind of interferences in the credit approval part. So I think this is positive when we consider the sustainability of the program, maintenance of profitable profit from the bank. I think our population has greater indebtedness now in these last years and also with very high costs for this debt. So I think it's absolutely natural what's happening. We noticed in one or other cities where traditionally, there is a greater level of default. So I think -- I don't think there is a great point of concern in this moment. There was in the beginning of July, but I think that things are going back to normal. We see a greater amount of access to our company via site, WhatsApp, we see a greater volume of visits in our stores. We see more appointments for visits, right? So the beginning of July and beginning of August has shown that, that 1 month, 15th June to 15th July, when there was a reduction of demand, things have gone back to normal. But I see Caixa being very cautious with credit analysis because we want it to be a program that operates with profitability and they're under control. But everything is okay. There isn't a huge problem here. It is natural for us. We've had a stronger -- more problem than last year, but it's okay. The Minha Casa, Minha Vida improvements, we noticed that the budget of the program has been used at a pace that is lower. When we consider the monthly consumption of the budget, we clearly see that there should be enough budget for the program in the end of the year, specifically levels 3 and 4, where there aren't uses of subsidies. So the consumption of the subsidy budget has been close to BRL 1 billion a year -- a month and we'll reach the end of the total budget we have for the year, BRL 13 billion. But when we consider the burden here, we noticed that the FGTS budget and the pre Sao budget, there will be available resources for the end of the year. So there is room for eventual adjustments to incremental affordability and have more families in the addressable market. Perhaps there might be adjustments because there is available budget in those levels where there is no consumption of subsidies. We have to wait. We have to see all of this comes from the ministeriate, right? And it has to go to approval of the FGTS Board. We have to see what's going to happen, but we have -- I believe there is room for affordability in certain levels. There is room for something to be done because of the budget volume we have for the amount, right, we have for this year.

Thank you for your question, Ygor. Next question, UBS, Tainan Costa.

A follow-up of this first question. Considering this impact we saw in June, the changes in Caixa, so vis-a-vis the scenario if there was a change in the company's strategies, considering pró-soluto, if there are selling efforts in terms of marketing to have a greater conversion of this client, have more clients in Caixa to approve, if there is a change in the strategy and how this talks with the growth strategy of the company. For example, vis-a-vis the scenario, eventually lower sales than was foreseen, if the appetite for growth changes for next year, bottlenecks for the growth of operations in '27. Two questions.

So I think what happened there mid-June to mid-July with things going back to normal in these last days, these last weeks, nothing changed really in our strategy. I think it is natural. We expected that we could have the impact of the World Cup and the impact of elections in our operations. We have always been saying-- talking about this in the market. There was always a possibility of there being impact because of these events. But I believe that is specific. So it's contained. The projects are being approved. And an important point that I'd like to stress here because I said this in the beginning, we are going to adjust the volume of launches because of sales. We're not going to put capital in inventory with the capital cost in Brazil, there is no just of us having an increase in sales of our inventory because of our capital cost. We want to build that product where there is a demand, where in a city where demand is solid. So we have sales -- speed of sales, right? We wanted to have it be more than what we delivered in the first half. We want a VSO of [ 25% ] or a little more than 25%. We continue with this priority. And with demand, there will be a launch. We had a land bank of more than BRL 60 million today, very healthy, a relevant project volume being approved and the demand, once it goes back to the historical levels, we certainly can see to this demand and meet the demand when we consider the projects to be approved and to be launched. With regards to execution, there is no cost problem. We do not see a problem, a pressure of important products, right, that could impact our margin or increase prices. We have tried to increase our prices relative to the cost. But what happened in February and March because of the increase of the price of oil and the products we use in our works, the material we work, things have been in keeping with what we have shown the market. There isn't this concern, right, that the buy side had. We are not seeing things materialize. So priority continues being VSO, invasion controlled. So from the point of view of the execution, you see the pace of the evolvement of our works, 10% growth of revenue from one quarter to the other, the same amount of sales. The growth of revenue is because of the advance of the works. We have been able to have a very positive performance with regard to the advance of our works. June was a record of units produced by Direcional. We continue over more than June. This is a drought period, right? And this is where we most produce, right? We have been able to deal with all the labor challenges, industrialization, because of industrialization, modification of the material we use in our works. So from an execution point of view, we have performed better than we could imagine 12, 18 months ago. Of course, there are challenges, but challenges have been overcome by our engineering team. So we have conditions of producing and delivering. Of course, this is going to develop -- define what we launch. What defines is demand, affordability and construction pace and also competition. We need August now. The whole of August which will be a month without these events and it's before elections, we will see how things will behave. But from an operational point of view, supply and execution, we are prepared for a reality where there is greater demand. But we have to wait, and we will work with our company based on the demand from our clients.

Santander, now. Fanny, you have the floor.

Two questions. First, if you could give us some color, how do you see the sales tendency evolving now in the second half? And if you could give us more information with regards to cancellations. What were the main states canceled, right, where there were cancellations? And also, is there -- you talked about Manaus, right? But any other place where you have a greater amount of cancellations? And if part of this cancellation is associated to a policy that is more cautious from Caixa. Also with regards to cash generation, you said that July was a very strong month in terms of collection. So we want to know what we can expect for the second half of this year? And if there is part of this improvement, right, it is coming from greater focus in the sale of inventory, which is what we saw in the second Q happening. So I want to understand if you see more inventory sales, right, because you have a very strong POC, right? So do you see -- could this eventually come with a stronger cash generation than expected by the market for the year?

Fanny, when we look at sales, you talked about the second Q, but I believe now it's the third Q. We had an impact in the beginning of July, which was very similar to the end of June. And now we see an improvement in the last weeks, the last days of July, which increased day after day and August has been good in spite that it's only the 11th -- we had 11 days of sales. So I believe things have gone back to normal. I believe there can be a small impact in terms of cash adjustments when we consider the current situation. Well, I don't believe there will be more adjustments that we want Caixa to make money with the program. I wanted to -- I want the program the Caixa will only work in the program if delinquency can remain in levels which will allow them to have returns for the program, right? It's a bit -- we noticed when the main banks of the countries disclosed their balance sheet. Well, we're going to continue. We're going to have more clients. We want to offer them more clients. And I don't think we're going to have a problem here. It is -- Caixa has a very criterious analysis showing the technical character of Caixa, although it is a bank of which shares are retained are held by the government. So I think things tend to go back to normal. And I believe that the elections will have a lower impact than World Cup, but this is just a feeling. So let's wait for the second half. In terms of investment decisions, in a company. If you look -- if you consider a World Cup or elections, perhaps this is not the most adequate period, right? We have to see a longer period here. We have focused in sales of inventory. We've had a positive sales in Rio de Janeiro, where we had the greatest POC of the works. So more relevant cash generation even with the net sales being lower than the first quarter, it came from these inventory -- the sale of inventories in Rio. Although if we had less sales, these are works we had where we have the greatest amount of interest rates in the production in our cost. So when we see these works with a greater POC, generally, there is a greater amount of cost represented by interest rate. This is where we can have more financing to production. These are works. So if we look at the adjusted gross margin, the reported gross margin, we had a difference -- over the difference of the second Q, adjusted at 42.8% and reported at 40%. So these are 2 percentage points. It was a little closer to 2% 2.2%, 2.3%. So we had 0.6 bps more in the adjustment. Because we had more interest rates from these works where there were more inventory with an elevated POC, we had a greater amount in Rio than last year. We're going to continue focusing on inventory. And when I talk about DSO and the sale of inventory with a higher POC, the consequence is cash generation. Since we are prioritizing cash generation and our aim is to shorten the duration of our cash generation, we want this cash back as soon as possible. The consequence will be in terms of DSO and cash generation and a return of this unused cash to our shareholders via dividend or buyback, we're going to see the best allocation for our capital. Buyback is one option. So this is it, prioritization of the return of this capital and we try to have this where we have greatest return. I believe I answered your question. If there's any question, please tell me.

Next question, BTG, Cambauva.

I want to talk -- ask about the margin -- the gross margin dynamics you see in the pipeline. You have this high gross margin. There was -- was there an adjustment because of capitalized rates this quarter and the rep was also a little corrected, adjusted. So I want to see what you see in terms of gross margin in this inventory. If this inventory has had price increases once you have reviewed your tables, if the gross margin of the inventory is higher or lower than the average in the company. And also understand how you see new projects incorporating these new costs if there is some kind of -- if you're increasing something here because of uncertainties because of the war, this volatility in terms of commodity prices, how do you see the margin of new projects being launched now in the second and third quarter? Is it different than the deferred margin -- deferred revenue margin?

Well, first, with regards to the gross margin of the inventory, yes, we still have a gross margin, of EBIT, sorry, which is high above the deferred revenue. When we launch a product, the cost of the project is inflated. So in theory, the sale of those units, if you consider them, the gross margin would be the launch, the one launched -- when launched. And what we've seen in the last years in the way we work, once the market price rises, we increase the price of our units and gain margin. And our inventory that we have is an inventory with a margin above the deferred revenue, which are units I have already sold, right? So once I have units in my inventory, my margin grows. So I said we have more than 100 bps gross margins of revenue -- of inventory compared to the deferred revenue. If we sell more, we have more deferred revenue, right? So when we consider the volume -- the big volume we had in the first quarter, the inventory margin is greater than the deferred revenue margin. And when we launch a product, we wanted to be at a lower price, lower margin. We have hurdles here. We don't go below what we need to pay our capital. So the new launch comes with a lower margin. And as we gain in time and the price of the property rises, we gain margin in the inventory. So when I look at the quarter specifically and the last one, the expense of the deferred revenue margin -- having with the bps, we see that it was the same as last quarter. When the deferred revenue comes back, it kind of signalizes that the gross margin can be returned. And this is what we believe here. We always say this to the market. And I think that this is a midterm trend. But still, I think we are a little at here because we might see a gross margin coming back. But our gross margin should remain high for some more quarters. I don't know, Ricardo, if you would like to add to this. And I don't know if I was able to answer your questions. I think these are the main points. When we look at the deferred revenue, we noticed a slight reduction in the last quarters. We have been saying to the market that the gross margin was not exactly the gross margin we had reported. We saw a reported gross margin, which should be over the recurrent gross margin. But I believe that we continue with extremely solid margins above other recurrent levels. But when you see the rep, the deferred margin have a reduction, it is -- this has been happening in a lower pace than what we showed to the market and will continue as we look before us. But between the deferred revenue and the growth is small. The gross margin should have a reduction when we look before us, right? When we look to the future because of the launch of launches at lower margins than we have in the inventory. So we believe everything is very positive, very interesting. But I think everything we have been saying to the market is beginning to appear in the numbers in a very gradual pace. And I think very slowly, we should have a slight reduction of the gross margin, but within the expected and perhaps even better than expected.

Next question, Elvis, Itaú BBA.

First up, with regards to cancellation, which was very high in the second quarter, 16.6% compared to the gross sales and explaining a little -- the lower DSO, right? So I want to know how much you can quantify in terms of backlogs with regards to these units where the regional checks ended up jeopardizing these projects, right? And how do you see this going back to a historical average or if the impact it goes back? And then the second one is cash generation. We've had greater receivables in July. You had greater sales. So I want to know if the cash generation expectation for the year changes and what you are expecting in terms of leverage for the end of this year?

Well, I'll consider the first question and Paulo with regards to cash generation. Cancellations, well, the recurrent cancellation levels shouldn't be 16.6% of this quarter, where we're clearly showing in Manaus, we had 600 units canceled, although they were resold, but this impacted the cancellation percentage. Fortaleza is down. So now we have the federal district. We didn't have a relevant impact during this year of cancellations in the federal district. But certainly, I think you're seeing the situation we had there, specifically with BRB. So the program that exists in the federal district can suffer some problem. We're still trying to understand what's happening there and what can happen there. But I would say that Manaus, most of it has been cancelled. Fortaleza 100%. There's no more Cancellations now. Everything is normalized there. And one point we have to monitor now is the federal district in this moment. We had important -- we have important operations in the federal district with a large amount of units in Level 2. So we have to monitor what's going to happen there. That's a point of attention. But when we look at a longer period, the volume of cancellations should go to a level closer to 10% in the next quarters. Obviously, I cannot foresee what's going to happen in the federal district, right, in Brazil. But I think that in time, the amount of cancellations will convert to normal numbers and state programs, I think we have to certainly applaud Sao Paulo and Pernambuco where we can work with huge forecastability and strong confidence in state programs. The other states, which created programs, we noticed there were huge management difficulties here. And I think, in fact, these were programs that didn't have the positive impact that clients and families and companies imagine they would have. But these are lessons for everybody and we will see how this will behave. But I think this has given us confidence to work in -- what gives us confidence here is Sao Paulo and Pernambuco. In the other places, we're having some hiccups here, some problems, right? With regards to cash generation, Paulo.

Elvis, since we've said our cash generation is our focus, we are working hard in our business to generate more cash at each moment. We want to increase it. This is our history, right? We generate cash. We reduce leverage and we pay dividends. So we continue doing this. And even with the impact we had in sales in June and July, we saw July an important cash generation. The solution of these cancellations units, the speed, the sales of inventory in Rio went in this direction. The units in Manaus and other states did not generate cash, right? Because we sold and transfer was blocked. We wanted to stop the issue of checks to transfer. And then at a certain moment, we decided to resell to -- there was a demand. We see 95% of what we publicized, we sold to have cash. And this is the continuity for the rest of the year. I think the idea here is to trace specific scenarios. Where we're going to be in December. Where in December, our cash generation be. But we want to have room for payments of dividends and buybacks. We are already very deleveraged, right? The idea is to remain deleveraged, paying dividends. So this is our story. This is what we have been doing.

Next question, Piero, Citi.