MRV Engenharia e Participações S.A. (MRVE3) Earnings Call Transcript

Ladies and gentlemen, good morning. Thank you for holding, and welcome to MRV's Second Quarter and 2026 Results Conference Call. Today with us, we have the CEOs of the company, Mr. Rafael Menin and Eduardo Fischer; and the Chief Financial and IR Officer, Ricardo Paixao. [Operator Instructions] To open our second quarter 2026 earnings conference call, I would like to hand it over to Mr. Rafael Menin, CEO.

Good morning, everyone. Thank you for joining us for one more MRV earnings conference call. The second quarter confirmed what we have been repeating in recent calls. MRV & Co.'s simplification strategy is delivering results on the 2 most important fronts, increasing profitability in Brazilian operations and accelerated deleveraging through asset recycling in subsidiaries. I'll start with the number that sums up the semester. MRV & Co. generated BRL 470 million in cash. At MRV Real Estate Development, the gross margin reached 31.2%, the highest level in the last 7 years and still below the gross margin on new sales currently around 35%, a gap that will be closed over the next few quarters. The net revenue for the last 12 months reached BRL 10.8 billion and net sales totaled BRL 10.3 billion in the same period, a historical record. Revenue, EBITDA and profit continued to grow each quarter. These numbers are the result of a series of initiatives that each business area has executed and continues to implement. We continue to add another actions -- other actions that will result in a continuous increase in profitability and cash generation. In real estate development, virtually all land bank is purchased through SWAP and the land is becoming increasingly efficient, originating with margins higher than those of sales made in this quarter. We also expect the paid for land bank to fall by BRL 200 million this year in 2026. In production, we transformed the complexity of construction into an industrial operation with standardization and sequencing. It's a mature operation. In the last 5 years, we have built 185,000 apartments. And today, we have a pace of 170 apartments per working day, with the lowest execution risk in the industry. Our costs have remained well below inflation in recent years, and we strongly believe that we'll be able to add even more efficiency in the coming years. In terms of sales, pricing and pro-soluto have evolved significantly so far. Prices continue to be adjusted at a minimum in line with inflation, protecting future gross margins. In the pro-soluto approach, the focus is now on post key financing. The main focus of the sales team right now is on increasing gross sales and consequently, the volume of transfers to banks. The continued strengthening of the Super House and the maintenance of the Imob channel are the main levers for achieving these objectives. Equalizing transfers and production will result in an acceleration of profitability growth and most importantly, a new pattern of cash generation. In the subsidiaries, the quarter was marked by significant events. Luggo signed an MoU for the sale of its 13 already constructed developments valued at BRL 166 million, and these assets were sold above their book value. Urba, on the other hand, delivered its best second quarter in sales ever with 50% growth compared to last year and a gross margin of 47.3%. Moving on to our U.S. subsidiary, Resia. We made 2 very important announcements. In June, the sale of Ten Oaks and Rayzor Ranch developments for $139 million was completed, a transaction that was settled in July. And now in August, we announced the sale of additional assets for $170 million. With this, we reached BRL 2 billion in sales for the year, which will represent BRL 1.5 billion in cash generation for MRV & Co. and a 30% reduction in leverage compared to the end of 2025. We remain fully committed to the strategy and the path to building the best MRV in history. I thank our team for their work on this journey. Now I turn the floor to Kaka.

Good morning, everyone. Thank you, Rafael. I'll start by talking a little bit more about operations and MRV real estate development, which continues to evolve as shown by the second quarter data, BRL 2.75 billion in net sales, 11.3% more compared to Q1 '26, BRL 2.95 billion PSV launched in line with Q1 '26. We produced 10,900 units, 12% more than last quarter. This combination of sales and production growth positively impacted financial indicators with net operating revenue at Q2, BRL 2.75 billion, 8.9% compared to the second quarter of '25, and 7.4% compared to the first quarter of this year. Sales SG&A over revenue ratio improved by 1 percentage point in the first half of '26 compared to first half of '25, reaching 14.2% in the first 6 months of the year. Adjusted net income continued to improve year-on-year. In Q2 '26, we reached BRL 155 million, up 17% compared to Q1 '26 and 28% compared to the year. In the first half of the year, adjusted net income totaled BRL 288 million compared to BRL 139 million in the first half of '25. Moving on to the balance sheet indicators. I highlight the adjusted net cash generation of BRL 149 million, a growth of 27% compared to Q1 '26, reversing cash burn of Q2 '25 with BRL 36 million. In the first half of the year, cash generation totaled BRL 266 million compared to cash burn of BRL 87 million in the first half of '25. Annualized net debt over EBITDA ratio for operations in Brazil fell to 1.08x 15% reduction compared to 1.27x in Q2 '25 and 45% reduction compared to Q2 '24. Now about Resia. Resia remains committed to its deleveraging plan and accelerate the sales of its projects even before stabilization. In June, we announced the sale of legacy Ten Oaks and Rayzor Ranch for a combined value of $139 million, which was settled in July. Then on August 6, we announced the signing of the purchase agreement for the sale of the last legacy project, Memorial, and 5 more plots of land for a total value of $170 million with settlement expected in the coming months. Including sales already announced this year, the total reduction in Resia's net debt amounts to $290 million, of which $62 million received in Q1 '26, $87 million received in Q3 '26 and $141 million to be received in the coming months. Finally, I'd like to go over some consolidated indicators. MRV & Co. generated BRL 467 million in cash during the first half of the year, resulting in a decrease in consolidated net debt from BRL 6.3 billion at the end of '25 to BRL 5.9 billion on June 30. The cash flow generated from sales of Ten Oaks and Rayzor Ranch closed -- whose funds were received in July, added to cash flow generated from sale of Luggo of BRL 150 million and BRL 719 million generated from Resia's sales of Memorial project plus 5 plot of land will bring net debt to BRL 4.6 billion, a reduction of 28% compared to the end of '25. Debt covenant indicator measured by the net debt plus properties payable to equity ratio improved, closing at 0.57x against the upper limit of 0.65x. We will now start the Q&A session.

[Operator Instructions] First question comes from Gustavo Cambauva from BTG Pactual.

I would like to ask 2 questions. First, regarding Resia. You've announced a series of sales of assets. And I would like to understand in your dynamics of selling some assets before stabilization. So I would like to understand what might have changed in the company's rationale? I would like to understand whether the idea is to sell things as quickly as possible even if you don't capture the highest price, waiting for the total rental of the projects. And I would also like to understand how you see the fixed assets you have. I don't know if maybe your mindset has changed or not, I don't know. But do you believe that with this new strategy of selling everything before stabilization, should we think that the total divestment project -- process will be faster? Do you have any time line for that? And also, I have a question about Brazil operations. As mentioned in the opening of the call, this process of simplification of the company of leaving some locations and reduction in the number of types of projects, et cetera, types of modes you use. You're probably seeing some impact on the operation, either in the gross margin of projects due to simplification or reduction of G&A in structural terms. So what could you tell us in terms of benefits that you are already seeing from the simplification operations?

Cambauva, this is Rafael speaking. Starting with Resia. Resia has announced a sale of $400 million this year, which is an important figure. And with these sales alone, we'll have an impact of a reduction of 28% in the leveraging of MRV, which is a great number. But we are prioritizing cash when compared to the asset valuation, because if we had chosen to sell at a different timing slower in terms of the development of the market in coming quarters. As you mentioned, an asset that was sold, yet not stabilized. We sold it faster. Of course, we leave some money on the table. But on the other hand, we'll have a cash generation from these assets only of BRL 1.5 billion, which is significant. The next asset to be sold will be either Golden Glades which is different from the others because given the very good rental performance, the NOR (sic) [ NOI ] is positive and -- NOI, and it's in a strong market with a lot of demand and little supply. So shortly, we'll start the marketing process for that asset, which doesn't mean that sale will happen this year. We may be able to sell it in 2026, but we are not sure about that. And we still have 3 plots of land that were not sold that I would call a long tail. And this longer tail and -- for plots of land and other assets, a good portion of them should be sold and settled throughout the year of 2027, meaning that what we propose to sell, as we said in the last quarters that our priority is cash will likely -- is likely to happen mostly this year, and there will be a small residual value left for 2027. And there may be this last asset that -- which is in North Town that's not consolidated -- I'm sorry, North City that's not consolidated in our balance sheet. And -- so it's an investment in equities. At some point in time, it will be sold, but that might happen only in 2028. Now speaking about Brazil, you asked about construction, but we've advanced in production department, in construction, in commercial department as -- and we tried to be very -- explained very well at MRVD -- MRV Day, but all 3 business areas are evolving. Our cost of construction in the last 3 years has increased very little, 3% compared to an inflation rate of almost 20%. So that explains the significance of what has already happened and what was done. But looking forward, we see important opportunities of improvement in production, in sales. Sales, we try to accelerate the sales volume. In days, we are buying efficient plots of land, mostly using swap deals. And so I'm very confident that what we've done in the last 3 years and our projects in the pipeline in these 3 business areas will place us at a better level and the best in industry in terms of operational quality. It's worth remembering that we are the only company that operates in a great scale, and a large scale and spread out throughout the country in a very mature way. Nobody produces 40,000 units per year at the pace of MRV in the last 10 years. So in the last 2 to 3 years, the homework done by our team and that's been developed by us with all that, I'm absolutely sure that MRV will go back to being the best company in its industry. It is the largest already and -- but our challenges are much smaller than compared to other companies that operate in Brazil. So it's just a matter of time until we provide wonderful results in terms of profitability, return on invested capital, very low leveraging. So myself, Eduardo and our team, we're absolutely sure that quarter-on-quarter results will be better. And soon, MRV will again be the best company in housing -- affordable housing in Brazil by far.

Our next question comes from Tainan Costa from UBS.

I would like to go over the topic of default scenarios. This news we've heard about families that are indebted. So how do you see the assumptions that you've used in terms of making provisions for your pro-soluto portfolio? If you could explain to us what's your average provision level? What's the behavior of this portfolio in 2025 and now 2026? Do you see any worsening or not? And now thinking about receivables, have you felt on the investors side that they are more demanding when negotiating pro-soluto portfolios? Do they request any extra guarantee or maybe negotiations at a higher rate compared to the end of 2025?

This is Ricardo speaking, Tainan. Regarding the default scenario, our provisions for the same ratings have remained stable through time. What's happening, I don't know if you noticed, but our PDV orders for trade receivables has grown a bit. This is because we have been able to reduce the pro soluto after keys, pro-soluto B that has a default rate notably higher than pro-soluto A. So at the time of sale, provision is a bit lower because we're able to sell concentrated on receivables before the key than after key, but we're negotiating with better ratings. So our provisions are totally covered and in line with the real PDV that we see. And this marginal reduction in the provisions for PDV balance is much more related to the quality of credit and more concentrated on trade receivables after keys. So the transfer of receivables. The receivables are performing very well. The buyers are recurring buyers for these transactions, and we have not seen any pressure to increase the rates because of that. Actually, we should expect a reduction in rates given the behavior of the portfolio. But then the macroeconomic fundamentals have had a negative effect in that sense, and so we have maintained the same rates as we -- in our negotiations from past years.

The next question comes from Fanny Oreng from Santander.

I have 2 questions. First, I would like to ask you to give an update about the Manaus operation. How do you see the volume of transfers and cancellations in that region? Also, I would like to understand the importance of state programs in your sales? And how do you see this state government programs developing in coming months, given the fiscal situation of many state governments that now starts to come up. And also, Rafael mentioned in the opening remarks, the margin of new sales close to 35% and the 31.2% margin. And he said you expect to close in the next quarters. I know it's difficult to give guidance, but how feasible -- what would be a feasible thing to expect when MRV starts to reach the level of 35% in terms of gross margin? These are my 2 questions.

Regarding Manaus, we were quite diligent. And last year already, we did not sell using the theoretical state check benefit. So all the cleansing of the database, so to speak, happened last year and very little was left for the first quarter of this year. Since then, we are selling well, transferring well with very high margins. So Manaus today is an extremely roundup operation for MRD. As for the programs, we only start selling. For example, there's a new program now in Alagoas state. And another one is being discussed for another state in the Northeast, but we only start to sell after we have the guarantee that the process is working well. So far, we don't have any problems with state checks. All of them are working well, and we don't have any liabilities regarding checks. But what's interesting is that these state programs are being managed in a more mature way now. Most of them -- most governments have a separated annual allowance for the programs. So since that's included in the state budget for the year, we understand that the programs will have enough funds to guarantee the subsidy or the transfers up until the end of the year. In some states we operate, what we already see is a lower volume than the amount budgeted for the year, which is good. So for the year of 2026, I'd say we are safe. Of course, next year there will be a change in government and with elections. So we don't know what will be at stake for '27. But for '26, no surprises. In terms of margins of sales, we're doing well because we interrupted these last 2 years' recovery. In the first quarter, we broke down to you that we included the expected future inflation rates given that the energy prices increased and MRV as all the companies in the industry included higher inflation rates for the future. For the second quarter, the pace was a bit slower because there was an amount of units concentrated on Flex sales with higher margins, but we prefer to be a bit more diligent, and we accelerated the cancellation of these units. And therefore, the pace of recovery was a bit slower. Margin went up by approximately 20 bps -- and so we expect that margins will again go back to the pace we delivered in 2024 and '25. So that some quarters from now, the gross margin will converge to the current gross margin of new sales, which is close to 35%. And also, this margin incorporates interest rates. So the margin ex interest rate of 35% is -- would be equivalent to 38.5% ex interest.

So speaking -- thank you, Rafa. Speaking of the state programs, could you tell us how much that accounts for in sales?

Fanny, I don't have the figures now, but I'd say that with some margin of error, but then Kaka could tell you in more accurate terms. I'd say 40% of MRV sales are made with some benefit from the state government.

The next question comes from Piero Trotta from Citi.

My first question has to do with commercial sales -- sales expenses that increased compared to the first quarter, although the indication from the first quarter is that this line was a bit higher due to extraordinary marketing expenses. So I would like to understand what would be the recurring level for this line. And as mentioned in the release that the team of the Super House of MRV has increased. So what do you see in terms of standardized pattern for sales expenses? And if you could tell us what that line should be like in terms of percentage of revenue, around 9% to 9.5%. That would be nice. That's my first question. Now the second question, as Rafa mentioned in the presentation, there was a reduction of BRL 200 million in the paid for land bank this year. And up until 2029, there will be a more significant reduction. We know that some plots of land were purchased in the past and with some installments yet to be paid this year and next year. So I would like to understand what should be the cash output to pay for these plots of land that were purchased way back?

This is Fischer speaking, Piero. Commercial expenses, sales expenses, you mentioned something significant. We've made an effort to cause our Super House to become more and more relevant, and we see this happening. So this is a key strategy to grow our sales. And as you saw in the presentation, the team increased and that brings new expenses together with a challenge in terms of productivity gain, especially in the new team, and we told that. As we see this team gaining productivity, this initial expense is diluted through time. So what should you expect? Looking forward, we want to attain a greater sales volume as we've been able to do, and a dilution of these expenses that are already in the system now. So you talked about 9%, 9.5%. This is our vision for sales expenses. And if I had to say something, I'd say that in the future, there will be a greater dilution of such expenses regardless of the gross value, what matters is how much they influence the total. And I see this downward trend for that. We are already operating at a very efficient level, but I believe that there's still room to gain further efficiency. So my vision is that this figure tends to improve in terms of percentage. As for land bank, when the land bank is paid for, a large portion of that -- those disbursements have been made. But yes, there is some parts of the land bank that remain to be paid when the development is launched, but the vast majority of that amount has been paid for. So I wouldn't worry too much about the disbursement line for these paid land bank because most of it has already been paid for. Now what we see of BRL 1 billion from 2029 onward, there is an output pace because we have to develop this land and sell them. But I wouldn't worry about the additional disbursement around these plots of land because they will be less and less significant in the balance sheet as a whole. Is that clear?

The next question comes from Pedro Lobato from Bradesco BBI.

I have 2 questions. I would like to understand how you envisage the price increase dynamics and how that should offset the VSO, when -- what do you consider when you think about that front? And in terms of cash generation, ex transfer of receivables that were close to BRL 70 million. I would like to understand the transfer of land, assignment of land. How do you see the progression of this line looking forward?

Pedro, this is Fischer speaking. Well, price increases. As we said in the release, our expectation is at least to be the same as inflation. We've disclosed what the price increases that comes from pricing in My House, My Life, " Minha Casa Minha Vida ", what comes from SBPE, all that is detailed in the material. And we're -- but we attain -- we will aim at, at least the same price increase as inflation. Having said that, we see possibilities of having increases in operations spread out throughout the country. There are always opportunities that we try to capture all the time. And our strategy is to cause the pro-soluto after key to continue to drop, especially as Kaka mentioned in the PDVs in his speech. So we see at least inflation rate with possibility of increases. We've always operated a bit higher than inflation in the last quarters, especially when we talk about the entire dynamics, as Fanny mentioned about the regional checks, there are changes in the federal programs that has happened. And when I include all of that, we think about at least inflation rate with some possibilities here and there as we've been able to benefit from. So in that front, we are confident when I consider everything together, especially that because the pro-soluto post key is not growing. Now about your second question, the cash generation comes from that dynamic. Our disbursement below -- per unit has capped below inflation. On the other hand, we have pricings that includes inflation rate at a minimum and over that. So our dynamics puts us in a trajectory of constant cash generation. Now looking -- the second half and then 2027, MRV real estate development, Brazil will deliver a growing cash generation dynamics. As about the land bank, the land bank has been disbursed already. And this disbursement we've been made to cause the land bank paid for to drop brings an additional advantage because the amount paid for the land has already happened. So when I launched the product for those units, the cash generation just comes net of the cost of the land. So that boosts our potential in terms of cash generations when we sell projects on lands that are already paid for. So the whole system is positive, and this dynamic will continue to happen, and you see MRV delivering cash from operations on a growing trend. Is that clear?

Our next question comes from Pedro Perone from Bank of America.

Rafael, Ricardo, Eduardo and the whole MRV team, our question is regard -- is related to the participation of the noncontrolling parts of Resia. On a quick analysis, in the last 6 quarters, minority shareholders have absorbed less than 5% of losses in Resia, but still carried BRL 470 million in positive equity in the quarter, which is around 75% of minority shareholders consolidated in MRV & Co. Do they have a preferred right in terms of settlement against losses? Or should minority shareholders absorb losses on a pro rata basis. As the reduction of noncontrolling shareholders associated to the sales of Memorial, does that account for cash return or allocation of losses or just allocation? That's the question.

Okay. This is Ricardo speaking, Pedro. Most of the shares of minority shareholders have a returned -- guaranteed return. And the capital return since it's equity, it goes through the results. That's why you don't see. It goes through -- it's after net income. And the second question was about? Could you repeat that, please?

BRL 138 billion result in the share of minority shareholders in Memorial?

Yes, a deconsolidation of results. When we received those funds, we automatically paid funding for construction and minority shareholders before settling.

Our next question comes from Elvis Credendio from Itau BBA.