Minerva SA
BOVESPA:BEEF3
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Minerva SA
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Good morning, ladies and gentlemen. Welcome to Minerva video conference to discuss the results of Q3 2022. Today with us are Mr. Fernando Galletti de Queiroz, CEO; Mr. Edison Ticle, CFO and IRO; and Ms. Tamara Lopes, Sustainability Executive Manager. We inform you that this presentation is being recorded with simultaneous translation. The translation is available by clicking on interpretation. For those of us who are listening to the video conference in English, you may mute the original audio by clicking on mute original audio. Additionally, we inform you that the presentation is available for download at ri.minervafoods.com under presentations. During the company's presentation, all microphones will be disabled. [Operator Instructions]
Any forward-looking statements that may be made during this conference call relating to the Minerva's business outlook, operational and financial targets are based on the management's projections, which may or may not occur. Investors should understand that political factors, macroeconomic and other operational factors may affect the future of the company, thus conducting to results which differ materially from those expressed in such forward-looking statements.
To open the video conference. I now turn the floor over to Mr. Fernando Queiroz, CEO.
Good morning to all, and thank you for attending this video conference to disclose the results of Minerva Foods for Q3 2022. Minerva ends the first 9 months of this year by demonstrating its excellence in operational execution and has delivered a sound set of results, which attest to the soundness of our corporate strategy and consolidate our leadership in South America. Our focus on operational execution, together with our financial discipline and commercial expertise are essential for us to continue to deliver excellent performance with record EBITDA, strong cash generation and an even sound balance sheet.
In Q3, we reported record numbers. Gross revenue was BRL 9 billion. EBITDA grew strongly by 24% year-on-year. and was BRL 806 million, a record level. It contributed to a sound net income and a strong generation of free cash flow by BRL 536 million in Q3.
Additionally, I draw your attention to our balance sheet. At the end of the quarter, we had the lowest-ever leverage since 2008, and net debt over EBITDA was 2.18x. This attests to our commitment towards a sound capital structure, which is one of our main strategic directions. Before giving you further detail about our quarterly performance, I would like to share a little bit about our vision relative to the outlook for the global animal protein market and how our strategy and business model uniquely positions us to capture market opportunities.
The international markets, especially beef has sound fundamentals and a positive outlook, especially for South America. The increase in the availability of finished animals in our continent, together with the restriction in the North American supply of beef in the next few years allow us to have unique opportunities as exporters. We also have persistent sanitary problems and weather difficulties in some of the main producer regions of animals, such as the EU, United States, Australia, Europe and some Asian countries. And last but not least, there is still volatility in the grain market and a scenario of cost pressure and food inflation.
This is a very positive scenario for exports in South America.
Also, there has been consistent increase of the availability of animals in Brazil as a consequence of the reversal of the cycle. This is a trend that has been consolidating and provides us with a good outlook for 2023, 2024. South America, with its pasture-based livestock systems becomes even more competitive in the global beef market, especially if we consider the current environment with inflationary pressures. The intense volatility in the global grain market, which has been impacted by adverse weather in producer regions, the conflict between Ukraine and Russia and the challenges in global logistical chains is one of the main challenges for the production of animal protein chains, with a direct impact on costs in the production chain of pork and poultry and in the beef supply chain, especially in those regions, which rely on confinement systems.
This results in a significant loss of competitiveness, which benefits exporters from South America, where beef is produced on pasture-based livestock systems. The cost gap has increased consistently and allows us to have more access to markets. We have a scenario that should drive new commercial opportunities and open more space in the worldwide market for our beef.
Going back to our results, I would like to highlight our sound performance in distribution domestically. We have continued to grow in segments where profitability is greater, such as food service, niche opportunities and premium markets. The outlook is also positive in the domestic market, given that we are going to benefit from the growing availability of animals and seasonal consumption of beef at the end of the year. In 2022, we should also see the impact of the World Cup. Additionally, we are working with partners and online sales platforms, which increases our penetration and the range of products and maximizes our commercial performance and distribution of products to domestic markets.
Innovation-wise, in addition to our progress in digital platforms, which now account for 10% of our distribution and allow us to increase our market intelligence and commercial footprint. We also have advanced analytics projects where we focus on data analytics and artificial intelligence, which allow greater accuracy and speed in analyzing scenarios and opportunities for arbitrage.
This maximizes operational efficiency and commercial efficiency.
And finally, our corporate venture capital initiatives continue to grow and give us greater maturity and operational maturity. Innovation is one of our corporate values and an essential pillar of our business model. We will continue to evolve the innovation ecosystem to increase opportunities to create value for our business. We connect venture capital initiatives to our operations, which allows us to leverage these initiatives.
On Slide 2, I'm going to give you a little bit more color about the highlights of Q3 2022. I'll start with gross revenue, which has again been record and grew 15% in the quarter, achieving BRL 9 billion in Q3 2022. LTM was BRL 33.5 billion. The consolidated revenue from exports increased by 17% year-on-year and now accounts for 70% of our gross revenue. The export performance reflects the consistent global demand for beef and attached to our commercial expertise in serving international markets.
In terms of operating profit, our EBITDA has reached record levels quarter-after-quarter. In Q3, it was BRL 806 million, a 24% growth year-on-year with an EBITDA margin of 9.6%. In the last 12 months, accumulated EBITDA totaled a substantial BRL 3 billion, the highest ever in 12 months. Again, I would like to highlight our commercial, operational and financial excellence, especially the advantages coming from our diversification in terms of geography, such as our ability to arbitrage markets in a scenario of volatility. This allows us to control risks and have greater profitability. In line with this strategy, we continue to evolve our initiatives in Australia. At the end of October, through our JV in partnership with SALIC, we announced the acquisition of 2 sheep slaughterhouses in Australia, which takes our daily slaughter capacity to almost 20,000 heads and positions us as leaders in the Mutton market in Australia. This initiative is in line with our strategic direction and complements our operations in South America, thus maximizing commercial opportunities and operational synergies. It also reduces risks and contributes to our strategy to consolidate the export market of animal protein whilst respecting our capital discipline and the maintenance of a sound balance sheet with a lower risk profile.
In terms of our capital structure, at the end of Q3 2022, our net leverage was reduced to 2.18x net debt over EBITDA, the lowest since 2008, even after the payout of BRL 128 million in dividends in August. Our liquidity position remains comfortable. And at the end of the quarter, we had BRL 8 billion in cash, which combined with a duration of approximately 5 years allows us to have comfort and flexibility in view of the opportunities and challenges ahead of us.
We continue to operate to improve our capital structure. In Q3 2022, we repurchased and canceled approximately $13 million of the 2028 bond and approximately $56 million of the 2031 bonds. Year-to-date, we have repurchased and canceled bonds worth totaling $214, which attests to our commitment to a sound capital structure, which is less onerous and has a better risk profile. Throughout our presentation, Edison is going to give you a little bit more color about this.
As a result of our financial and operational excellence and of a sound balance sheet, the generation of value to the shareholders is one of the main directions of our management. In August, we distributed BRL 128 million in the form of early dividends. Year-to-date, Minerva has distributed over BRL 328 million, approximately BRL 0.56 per share.
Since 2020, the company has distributed over BRL 1 billion, that is BRL 1.94 per share. The generation of value for shareholders is one of the main pillars of our strategy to allocate capital and our performance has reiterated this message quarter after quarter.
Speaking of the other highlights. In Q3, we had 2 great news for our exports. The recent certification of our Brazilian plants to export to the Canadian market and the beef supply agreement with Hilton Food Solutions, one of the largest distributors of food in the U.K. These initiatives increased our footprint in premium markets with high income. Before moving to Slide 3, I would like to highlight another initiative from our corporate venture capital initiative, with an investment in Foodtech Liv Up. This accelerates our penetration into niche marketplaces with high growth potential. Also an important initiative in the carbon market took place.
MyCarbon in October were responsible for selling 20% of all the carbon credits negotiated in the first auction of the voluntary market carried out by the Saudi Arabian sovereign fund. This is yet one initiative that reinforces our commitment to sustainability. One of the pillars of our business model. In addition to the development of strategic actions and generation of value in the carbon market. We believe in this market. We can become leaders due to our platform suppliers, the work we developed with the suppliers, which allows us to originate credits and to generate more income for our producers as well. Tamara Lopes, our Executive Manager for Sustainability is going to give us more details relative to ESG.
Moving on to Slide 3. We'll talk about the operational and financial performance of Minerva in Q3. We'll start with the exports. In Q3, Minerva Foods consolidated one of its main competitive advantages. The strategy of geographic diversification, which increases our capacity to arbitrage market distortions and allows us to have commercial and logistical solutions, which are increasingly efficient. This maximizes our competitiveness in the global market. On the lower right-hand corner, we have more details about our exports for Q3. Asia is the highlights and accounts for 52% of the revenue of exports with China accounting for 44% of the total, followed by the Americas, CIS, Middle East and Europe.
On the right-hand side of the slide, we have the breakdown of gross revenue in Q3. China is still the main driver of revenue for the company and accounts for 33% of the total. However, China is followed by other markets such as Brazil, Chile, Argentina, Chile, sorry, United States, Middle East and Western Europe, which together account for nearly 40% of our gross revenue. Before ending and passing the floor to Tamara, I would like to say how optimistic we are in regards to the outlook for beef through our strategic -- a strategy to diversify geographically. Now with the inclusion of Australia in our footprint, we have increased our access to the international market and have more opportunities for arbitrage with a focus to reduce risks and maximize the profitability of our business.
In this context, the outlook of the international market is promising and the strong imbalance between supply and demand allows us to tap relevant opportunities. For example, in large and fast-growing income markets, such as Asian countries, in premium markets, such as the U.S., Western Europe and now Canada.
We also have a good outlook in Latin American countries, Middle East, Eastern Europe and Africa regions where there is traditionally more volatility, and therefore, great opportunities for arbitrage and value maximization.
Our strategy is to continue to focus on our business model, maximizing our competitive advantages, investing in innovation and niche opportunities on risk management to implement commercial and logistics solutions, which are increasingly efficient and profitable to generate value to all of our stakeholder chain.
I now turn the floor over to Tamara, who's going to talk about our sustainability agenda.
Good morning to all, and thank you, Fernando. Q3 saw important advancements in our ESG agenda in line with the commitment to sustainability announced in 2021. The company has pioneered illegal deforestation in the supply chain in Latin America. One of the highlights in Q3 was the increase in the percentage of direct supply in farms, which are geographically monitored, especially in Colombia, where the number increased from 40% to over 80%. In Uruguay, we started a study about the social and environmental legislation and a geographic diagnostic with a view to analyzing the size of rural properties in different regions in Uruguay and the parameters, which are applicable for geospatial monitoring.
This has been conducted in cooperation with the cattle purchasing team at local level and NicePlanet Geotecnologia. We also had for the ninth consecutive year, 100% of compliance with the public livestock commitment signed in 2009.
The assessment of the results was vetted by BDO RCS independent auditors, and this reinforces how robust our monitoring system is and also our efforts towards livestock systems that are increasingly sustainable. Additionally, we launched at the end of 2021, the SMGeo Prospec app, developing partnership with Niceplanet Geotecnologia. And this gives access to rural producers throughout Brazil to the same technology for analyzing social and environmental compliance. Minerva Foods has concentrated its efforts in engaging its direct suppliers and in training them to use the tool during visits in the field. We distributed more than 700 free vouchers so that our partners can carry out social and environmental analysis, and we encourage them to verify conformity of their suppliers.
On the following slide, we highlight the progress in the Renove Program through the development of the first project to generate carbon credits in livestock farming. We focused on partner farms and the project aims at generating credits from good practices applied in rural properties. In 2022, 50 farms were invited to participate in the pilot project, the first of its kind in Brazil. It connects farmers to the voluntary market through MyCarbon, a Minerva Foods subsidiary focusing on the development and sale of carbon credits. Under the program, we reinforced the achievement, which was the export of a carbon new-to-Certified product from our Uruguayan operations, where the emissions were offset through the sale of carbons generated in a local livestock forestry integration project. The credits were sold by MyCarbon.
At the institutional level, we are proud to inform that our sustainability report 2021 was awarded 2 international recognitions for the quality of the information provided its clarity and transparency. The company was awarded Best Sustainability Report organized by ESG Investing in the category of consumer goods and was 1 of the 2 winner companies for best in the world, promoted by Hallbars Sustainability Research Organization. Both recognitions attests to our commitment towards sustainability, one of the pillars of our business model.
The 11th edition of the sustainability report was developed according to the premises established by GRI and Sustainability Accounting Standards Board and also to the recommendations of the task force on climate-related financial disclosures. The 11th Sustainability Report 2021 is available on our site at www.minervafoods.com. We continue to allocate resources and make efforts to achieve our objectives and targets as established in a commitment towards sustainability of Minerva Foods. We aim to be transparent and disclose progress, challenges and opportunities.
I now turn the floor over to Edison, who is going to give you more details about our operational and financial results.
Thank you, Tamara. We're going to move to slide 6 and talk about the operational performance and the breakdown of gross revenue for the quarter and for the last 12 months. In line with our strategy and focus on international market, exports accounted for 70% of the gross revenue in Q3 and LTM. If you look at the breakdown per region, exports from the operations in Brazil were accounted for 72% of the gross revenue in the quarter and 70% LTM. Internationally, exports accounted for 72% in the quarter and 74% in the last 12 months.
On Slide 6 you see on the right-hand side, the revenue breakdown per origin. And Brazil is the main origin in the quarter and in the last 12 months, accounted for 51% and 48% of the gross revenue, respectively, followed by Paraguay, Argentina, Uruguay and Colombia at very similar levels. On the orders, you see a reference to our trading division, the old trading division. You see one of the main competitive advantages of Minerva, which is the strategy of geographic diversification, which allows us to arbitrage and to look for operational optimization and commercial efficiency.
Geographic diversification is one of the main pillars of our business model, and this should become even more relevant with our new footprint in Australia. On Slide 7, we are going to talk about net revenue and EBITDA. Net revenue was BRL 8.4 billion in Q3, a 15% growth year-on-year. In the last 12 months, ended in September, net revenue was BRL 32 billion, a record for the company in a 12-month period. In terms of profitability, EBITDA was BRL 806 million in Q3, a 24% increase year-on-year and the highest ever for the company in the quarter.
The margin also increased and was 9.6% in this quarter, the highest level in 2022 and a 1 percentage point growth relative to the previous year. In the last 12 months, EBITDA was record and totaled BRL 3 billion with a margin of 9.4%. If we look back at a longer period, our EBITDA practically [indiscernible] in the last 5 years. And this is because the positive scenario internationally for beef, but also has to do with our operational, commercial and financial excellence. Our profitability has to do with our ability to pass through prices, especially when there is cost pressure. Our operating cost is basically related to the price of cattle since the animal accounts for 80%, 85% of our costs, and the company has been very efficient in passing through the increases to clients, especially internationally, which is our focus.
Because of this, we have been able to deliver profitability levels, which are consistent and not very volatile in the last few quarters. I would also like to highlight that because of the reversal of the cycle in Brazil, the increased availability of finished animals in the next few quarters, we see a very positive outlook for our industry in the next 12 to 24 months. So on the one hand, we have a positive cycle with greater availability of animals. And then for exports, the scenario is very favorable. Think about the reduction of production in the U.S., in the region of 800,000 tons, which accounts for 10% of the international supply of beef, so demand will be stable or grow. The supply is going to reduce, and South America is going to be able to increase volumes at competitive prices, as we have never seen, especially in view of this reversal of the cycle, the retention of cows and the birth of costs that we have been seeing in the last few years.
On Slide 8, we are going to talk about leverage. Leverage measured by net debt over EBITDA in the last 12 months was 2.18x, that is below 2.2, the lowest level since 2008. If you look at our history since the mid-2020s, we have maintaining consistent balance, a healthy leverage which results from a very sound capital structure with a lower profile. This is a commitment we have undertaken to maintain a healthy balance sheet and an optimized capital structure.
On the next slide, we're going to talk about net income and operating cash flow. At the end of Q3, net income was BRL 141 million, and year-to-date net income has totaled BRL 681 million. In the last 12 months, it is BRL 831 million. Looking to the right-hand side of the slide, operating cash flow was positive by BRL 1.1 billion. In the last 12 months, operating cash flow was BRL 2.7 billion, and the outlook is positive even if we take into account the acceleration of operations and the strong growth of revenue in the last few quarters.
On Slide 10, we are going to talk about free cash flow, one of our priorities. In my opinion, the highlight of the quarter was the generation of free cash flow, which was positive in BRL 536 million. If you look at the buildup, EBITDA was BRL 806 million. CapEx, BRL 215 million, focused on maintenance and expansion of operations outside Brazil, especially Colombia. Then we have working capital, which was positive by BRL 339 million in the quarter. Financial result in cash, which was negative by BRL 329 million, which reflects higher interest rates and hedging costs in Brazil since the beginning of the year.
And you have a recurring free cash flow of BRL 601 million. If we had the cash effect of derivatives, which in this quarter burned BRL 65 million in view of the hedging costs. The free cash flow in the quarter totaled BRL 536 million. In the last 12 months, free cash flow totaled approximately BRL 1 billion. We start with an EBITDA of BRL 3 billion accumulated CapEx of BRL 797 million on expansion and upgrading and maximizing efficiency of our plants. The variation of working capital was negative by BRL 57 million in the last 12 months, and the financial result in cash was BRL 1.1 billion negative which has to do with high interest rate and hedging costs.
If we sum up everything, we have a free cash flow of BRL 992 million positive in the last 12 months. This free cash flow excludes BRL 128 million paid in the form of dividends in Q3 and BRL 528 million that we distributed in the last 12 months. That is in the last year and only in the form of distributions, we returned to shareholders more than half the cash generated in the period.
On Slide 11, you will see a bit about the net debt. At the end of the last quarter, net debt was BRL 6.6 billion. If you look at the bridge, free cash flow BRL 536 million, which includes the cash impact of the FX hedge. Then we had the noncash effect of BRL 14 million coming from derivatives, which was positive and reduces our debt and then the impact of BRL 128 million in dividends paid in August and the noncash effect of BRL 297 million negative relating to the FX variation of our debt denominated in foreign currency, which increases our debt. If we sum everything up, you see the bridge. And we ended net debt at BRL 6.4 billion. That is a reduction again despite the impacts of the payment of dividends and the negative impact of foreign exchange variation which together totaled BRL 425 million.
Fernando and I have focused on financial discipline, and we have been pursuing a very sound balance sheet. These are pillars of our strategy. Our commitment to capital discipline allows us to be even more comfortable to focus on operational execution to look for value for our shareholders. On the next slide, I'm going to talk about the structure -- the capital structure of the company. As we said before, leverage measured in terms of net debt over EBITDA was 2.18x, the lowest since 2008, and this is a reduction relative to previous periods even after the disbursement of dividends in August, that was BRL 128 million.
In terms of our cash policy, our position at the end of the quarter was comfortable, and we had BRL 8 billion in cash. This position should fall after the payment of the ALC acquisition, which should take place in Q4, we should be -- the closing should happen at the end of the quarter, and we should disburse this portion.
In terms of debt, 59% of our debt is exposed to FX variation, and we have a hedging policy, which we strictly abide by. This has been successful. Today, the company has maintain 40% of the long-term foreign exchange exposure hedged. And given the volatility in Brazil and the uncertainties I believe this policy is right because it has achieved its objective. That is to protect our capital structure. The duration of our debt is approximately 5 years, 82% of our debt is in the long term, as you can see in the amortization schedule.
On the right-hand side of the slide, you see a little bit about our liability management efforts. And in the last earnings releases, we mentioned how active we have been in the secondary market of bonds because we see value in repurchase operations. And again, this quarter, we repurchased and canceled the 2028 and 2031 bonds worth $70 million or approximately BRL 371 million. Since the beginning of the year, we have repurchased and canceled more than 215 million of bonds issued abroad. In the last 12 months, we have repurchased and canceled $503 million, thus decreasing our gross debt and financial expenses.
Another initiative to improve the profile of our financial liability took place in July. We issued BRL 1.5 billion in debentures, which is -- which backed the issuance of CRA for 7 years with a swap cost of 113.5% of the CDA, a very attractive cost. As I have been saying to you quarter after quarter, Minerva looks for a less onerous capital structure, which is healthier with a smaller profile of risk. And this is because of our commitment to financial discipline and for generating value for our shareholders.
I'll now turn the floor over to the operator so we can start the Q&A session.
[Operator Instructions] We will now begin with the questions. I turn the floor over now to Mr. Alves from Morgan Stanley.
A very impressive execution in this quarter. I would like to ask a question about Brazil and another one about Uruguay. I would like an update about the fourth quarter. What can we expect in October, we saw a price in dollars with a slight drop, but now a sharper drop in the price of the arroba. So what is the outlook for October and November? Is this a positive scenario better than we saw in Q3? Or are you -- should we be more cautious? And in relation to Uruguay, I have 2 questions in one. Would you be able to explain what happened during the quarter in Uruguay, how it evolved? In July and August, we expected a good performance or at least an improvement relative to Q2. But it seems to me that September was a bit more challenging. And also, the second part of the question is, when we look at October and November, what is the expectation?
So what drew our attention in Uruguay is that in terms of costs, they were lower the cost of cattle. It doesn't seem to me that the pace of slaughter has slowed down. So is the operation in Uruguay going to improve?
I'm going to talk about Brazil, and then I'll turn the floor over to Fernando -- to Edison, sorry. We cannot give guidance, but what we see is something similar to Q3, which was a very good quarter. Fortunately or unfortunately the expectations were high. So despite the good results, people are not really surprised. The analysts are not really surprised. But this is good. It seems that you're raising the bar and that we have been able to perform. So for Q4, what we see is something very similar to Q3.
In terms of Uruguay, the cycle is very positive. There is a change actually relative to what happened in the first semester. There is more availability of animals. The industry is now more aware of everything. And an interesting development in Uruguay is that the government has a different strategy relative to the rest of Mercosur. They have started bilateral negotiations, TLCs, and this should give results in the near future. Uruguay has the highest sanitary status of South America, has more access to markets and can be positioned in niches more easily. So we are very optimistic with Uruguay, unlike what happened in the first semester.
[Operator Instructions] Let's now move on to the next question. We have Mr. Gustavo Troyano or rather Thiago Duarte from BTG.
I have 2 questions. First, I'd like to talk about the margin in the quarter. When we see the evolution of the gross margin, which is historically the major driver of the operational margin, the gross margin was good in the quarter. And just as happened in Q2, it was offset by the expenses in sales, which has to do with the increase in freight, in freight and fuel, I would imagine. Do you have any idea of when we are going to see the normalization of these expenses with sales, either in Q4 or next year so that the operation as a whole can reflect this gain in the gross margin?
And then the second question, Fernando and Edison, you seem very optimistic about the outlook for the next few years in terms of demand and in terms of the cycle, the reduction in the supply of beef in competing markets. I don't remember when Minerva saw an outlook of that kind with such a low leverage. I don't think that has happened since the IPO. So my question is, how would you, if you were in our shoes, think of the -- think about the evolution of the capital of the company? You have announced the acquisition of ALC. Are we going to see more moves in that direction? Or should we think of moves in that sense and a payout of 50% in the form of dividend? Or should there be more dividends and less acquisitions? How much of this optimism is going to be translated into more growth in terms of M&A or distribution of cash to the shareholders?
As regards expenses with sales, it's mainly freight. So this is just natural given the increases we have been seeing in the last few quarters. We believe this -- we are close to passing through 100% of that. There should be something to be seen in Q4, but we are heading towards the end of that curve. And then once that happens, if the gross margin remains high, we can see additional improvements in net margin and EBITDA margin, especially if we think in terms of the positive outlook.
In terms of capital allocation, we acquired ALC. This doesn't affect our leverage in the way that we did it. We used basically the operational cash that is being generated this year. So this is in line with what we have been telling you. The dividend policy remains. We are going to pay 50% of the net income once the leverage is below 2.5. It's hard to talk about M&A. We assess these opportunities on an individual basis. And today, we have nothing major to assess. So we are going to continue with the same dividend policy -- and if we decide to go for an M&A, we will still continue to be responsible and focus on the capital structure. But we are not in a rush to acquire to grow the size of the company. We are responsible, and we look at opportunities as they come up, such as the ALC one.
This is a positive cycle, and we want to maintain a low leverage so that we can continue to distribute cash to the shareholders, 50% of the free cash flow was paid out to the shareholders. There is no reason for us to change that, especially given the favorable balance sheet that we have and the positive outlook for 2023 and 2024.
And just to add something, part of the expenses we have with logistics comes with the inefficiency of ports, demurrage of ships. And this situation has been going back to normal. So these expenses are now more acceptable in the future. And then we learned to work with volatile scenarios in terms of logistics. Minerva has looked for alternative ports for the origin and destination of our shipments. These costs have been passed through to clients. And this scenario allowed us to learn to work with logistics in a different way.
And then just to add to what Edison just explained. We have never seen a situation where grain inflation and the price of grain was so high. This increases the gap of production between our production system to and the production system in the U.S., for example, which depends on grains. There is also an inflation of energy, which affects the price of soybeans and corn for ethanol and diesel.
So we become increasingly competitive, and we are seeing South America consolidate itself as the best supplier because our production model is the most competitive in the current scenario. So we are very optimistic going forward relative to the international scenario and the demand.
Our next question comes from Mr. Gustavo Troyano from Itaú BBA.
I have 2 questions. The first one has to do with the generation of cash and working capital in the quarter. Is this something ad hoc that could be reversed in the next few quarters? Or is it because there was a change in the export mix. So you have cash that was released and could be retained. So what are the drivers for all this cash that has been released? And what is the sustainability of that trend? And then in terms of capital allocation, we discussed a lot about M&As in Australia and Colombia. Those were the 2 regions the company focused on. Then after Australia, the company now is -- seems to be thinking in terms of specific opportunities, but there's nothing under the radar. So in the short term, could we rule out moves in Colombia maybe?
So speaking about working capital, it was the receivables that accounted for the improvement. And this has to do with some large volumes that were shipped to China and were paid in Q3. And with the prices in China dropping a bit, there was a change in the mix. So if we don't sell to China and sell to other markets where the transit time is lower, the conversion of cash is also shorter. It's a shorter cycle. It's an improvement for the business. But the balance sheet is very comfortable, and we can focus on improving margin. So if we have to invest in working capital to improve the margins and it makes sense to sell to other markets rather than the markets we currently sell to, that's what we're going to do. Despite these variations in working capital, we have been able to keep working capital needs at the same level.
We have no need -- we had no need in the last 12 months. to increase working capital. So despite the quarterly volatility, we have to look at the film, not only the picture, the photo. In terms of M&A, we shared with you that Australia and Colombia were 2 potential places for M&A. In Colombia, we are in standby. There was a change in the government. So we are observing the changes in rules and what's going to happen. And if we do something, we will always do it whilst respecting our fiscal discipline. In Australia, we have been consolidating our position as the main producers of mutton and lamb, and we can gain a lot of synergies between the beef operations in South America and the Australian operations, and we are focusing now on integration -- on integrating the Australian operation into our global platform.
Our next question comes from Guilherme Palhares from Bank of America.
Could you talk a little bit about Colombia. There was a come back relative to the previous quarter despite of the challenges regarding the exports to Russia. So can you give us an update about that and how exports are performing in the region? And to Edison, can you talk a little bit about the hedging and give us some more details. When we look at the NDF that protects the 40% of your debt apart from the other derivatives. Can you give us more details about the results of this specific operation versus the hedge for the FX exposure?
The result of the long-term hedge is very simple. We only use plain vanilla. This is stated in our balance sheet. So what happened this quarter was that there was a devaluation by 15% in the currency, but the cost of hedging is approximately 10%, 12% a year. So that's 3, [indiscernible] bit per quarter. If you calculate the devaluation of the currency and the cost of carrying the hedge, the cost of carrying the hedge was greater than the devaluation in the quarter. So there was a loss there in that account of the long-term hedge. Then we have some locks for the short term for export to guarantee exports. And that's part of our strategy. So you lock the margin, you have a loss in the derivative, but you recognize more revenue. So there is an offsetting process going on there. But in this quarter, what happened was the cost of the hedging.
As I said during the presentation, and the financial result has 2 strengths. First was the CDI, which was a lot higher. The interest rate was a lot higher this year than last year. And as a consequence, the cost of the hedging was also higher. In terms of Colombia, we are assessing the situation, and we want to understand how the new government is impacting the market. The good news is that they are still focusing on opening for new markets. China is getting closer to Colombia, the U.S. has a chance in the midterm. All the markets are opening up to Colombian beef. Another important point with the new government in Colombia is that they have strict rules for the export of live animals.
So you reduce competition in terms of the shipment of live animals. And this has been positive for the industry to become stronger and to add value in the country. So these are pieces of good news coming from the new government in Colombia.
Our next question comes from [ Mr. Pedro Fonseca ] from [indiscernible]. [Operator Instructions]
The first question is about China. We see prices going down a bit. Can you explain what's happening? Is it that more players are dropping the prices? Do you think there is more room for prices to reduce? And what are the margins in China? And then the closing of the acquisition of ALC in terms of timeline for the payment of the M&A and for the -- for finalizing the process of integration of this acquisition, maybe that might not be a low-hanging fruit. What are the issues with that merger?
First about China, the pipeline for shipments to China is from 75 days up to 90 days. That's the pipeline. So what happened was that with the restrictions, lockdowns because of COVID, which again took place in China, the pipeline was disrupted. What we see now is that the containers are being taken out of the port the market has gone to its floor. And as food service opens again, and gains traction. The market is opening again. This is what we think is going to happen now, especially because we are approaching the Chinese New Year.
As regards to the acquisition of ALC. Edison, myself and the team were there last week. We have many low-hanging fruits. ALC has a great penetration in Southeast Asia, and in the Far East, and they will be able to sell beef from South America to these markets. We are also very strong on -- in the Middle East, where ALC is not very strong. So we are going to drive the sales there too. So the first low-hanging fruit is in the commercial area. And there are other possibilities to swap benchmarks and things.
So we're very excited about the challenge ahead of us for ALC. And as for the payment, yes, as I said during the call, payment will be made during Q4. We should disburse the transition balance in November. So as of the first of December, the chances are good that we should have closed the deal and the company should be operating under our umbrella, under the Minerva umbrella.
I have 3 questions here that we are going to read an answer. The first one has to do with China. The question is what is the outlook for 2023? And what about the JV in China?
Well, in China, as I said, when I answered Pedro's question, we saw a reduction in terms of the containers being taken out of the port, and this is now going back to normal, and we are evaluating all the channels to see how we are going to position ourselves in China. China will remain the largest and most important market for South America.
Second question is whether we want to invest in other proteins? And we don't want to do that. We're going to focus on beef. And the only protein we decided to invest in was lamb, but it's always red meat. The third question is if we have any objective to be rerated from credit agencies, and focus on leverage below 2. We would obviously like to be upgraded and have the re-rating, but we have to arrange that with the Russian, so to speak, to use a football metaphor. But as the company grows and we diversify whilst maintaining a healthy leverage, there is no target in terms of below 2 -- below 2.5, that's not shared with us, you see. So we believe that as we keep the company growing and the balance sheet is healthy, and there is free cash flow as we have been doing. These upgrades should come in time.
Mr. [indiscernible], you can continue to read out and answer the questions that you receive in writing.
Well, since there are no further questions, I would like to say that we remain available. You can send your questions to Edison to IR, but I would like to end this video conference by thanking you all for your taking an interest in Minerva. And again, I stress that our geographic diversification generates results. As I said, this gap that we see today between the 2 systems of production, the confinement system and the pasture-based system, this gap is increasing. So because of the concern about food inflation, we have been gaining market.
We can include in our structures companies like ALC, a different type of protein. So we feel comfortable in what we have been able to achieve as a company. I just wanted to end by thanking our team. We have been accurate. And we have been fast in acting. This is something that can only be praised, and this is only possible because we work together and tirelessly. Thank you so much all the other stakeholders who trust us who believe in us. To them, I would like to say that we will continue to generate value for our shareholders and stakeholders. Thank you so much again for attending this conference.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]