Grendene SA
BOVESPA:GRND3

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Grendene SA
BOVESPA:GRND3
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Earnings Call Transcript

Earnings Call Transcript
2022-Q3

from 0
Operator

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Grendene's webinar to discuss the Results of the Third Quarter of 2022. Today, with us, we have Mr. Rudimar Dall'Onder, the CEO of the company; Gelson Rostirolla, the Deputy Chief Executive Officer; and Alceu de Albuquerque, the Investor Relations Officer as well as the company's main managers.

We would like to inform you that the press release of the third quarter of 2022 is available on the website, ri.grendene.com.br, in Portuguese and English. We would like to inform you that this event is being recorded, and it has simultaneous translation into English. [Operator Instructions] Before proceeding…

U
Unknown Executive

Good morning, everyone. Our operator has been having problems with the audio. So I'm going to start. Before proceeding, we would like to clarify that eventual declarations done during this presentation about the perspectives and estimates of operations and financials of the company are mere forecasts based on expectations of administration regarding the future of the company. These expectations are highly dependent on the market conditions, the economic development of the country in general, the sector and international industry.

I would like to give the floor to Mr. Alceu de Albuquerque now. Please, you can proceed.

A
Alceu de Albuquerque
executive

Good morning, everyone. I would like to apologize for the operational problems, sometimes technology kind of plays tricks. So welcome once again, and thank you for your presence in our video conference for the presentation of the results of the third quarter of 2022. Before starting with the numbers of the quarter, I would like to tell you a little bit about the status of some of our projects and processes that we have had and we announced before. In the end of last year, we have disseminated the expansion of the production capacity of EVA in our Crato unit. So the end of the completion of the works foreseen for March 2023, and we are building a second plant -- a second factory with 12 square meters that will triple the capacity of production of our EVA products.

We moved from 15,000 pairs per day production to 25,000. We have acquired 16 new EVA injectors. And this new unit located in Crato, as you can see in the last picture on the right, it will have 4,038 photovoltaic panels with a capacity to generate up to 3 million kilowatts per year. This expansion is the result of a demand for products of -- EVA products that we have observed since the end of the last year. These products are more value-added products with higher lightness, increased lightness and comfort. So from March onwards, we will have this new capacity of 45,000 pairs production.

Talking about the process of internalization of the franchise network of Melissa. We are assuming the management of this franchise network with the objective of getting any closer to its final consumers and to strengthen our relationship with the franchisees, have more control over the channel and to accelerate the capture of fashion trends and other trends. So how can we do that? So since June, we have started to hire people that will assume the activities of the master franchisee. We have 71 employees hired out of 107 forecast.

The 71 employees are inserted in the main verticals of businesses like expansion, network management, training, capacity, franchise marketing and technology and retail technology since it has been announced, we have met with all the franchisees. And we have realized 106 meetings with -- to build action plans to improve conditions -- business conditions of our franchisees. And even though the contracts with the master franchisor will end in February next year, since November this year, Grendene will start to manage the network of franchises. And given the numbers, we will end the quarter with 389 stores. We are in October, we have 394 stores, and we will have 410 stores until the end of the year. Melissa Clubs represent around 60% of sales in Brazil -- Melissa sales in Brazil.

Talking a little bit about our Bergamotta labs, it's our lab of innovation. And here, I have some of the projects that we have been testing at the Bergamotta labs. And if these projects proved to be viable economically, the idea is to scale this project. So the first one I would like to share with all of you is the project of the franchise network of Rider. We inaugurated on the 26, 2 days ago, the first physical store of Rider. It is located in Sao Paulo in a building called Companhia. It's a very different building. It's inserted in a very highly cultural environment with a strong synergy with the profile of the products that we will sell in the store. It's a more value-added kind of products that we are going to sell in this store.

So the objective of this project is, firstly, to test the viability of a franchise, just like Melissa [indiscernible] to get Grendene get closer to the final consumers and she stranded the Rider brand. If it proves to be very successful, this project, the idea with this project is to scale that for the franchise network. And talking about the other project, MVP mode is Melissa Love Spot. It's the smallest franchise possible of Melissa, it's a unit that's completely autonomous where consumers can actually purchase Melissa products by themselves through a self-service with a virtual reality experience.

This person will kind of put the reality -- virtual reality goggles and they will like navigate inside of virtual Melissa store this project tries to address 2 main factors -- 2 main expenses of Melissa franchise, which is the expenses with in-person physical stores and employees. So this unit cost, it just has 6 square feet, it's a very small space and that reduces a lot rental costs. And the other expense reduction is that we don't have any people involved in this operation. Consumers will navigate virtually in this Melissa store, this person will buy online and then they will receive the product at home. So the pilot is already on from September -- October to December. And afterwards, we are going to evaluate the viability of scaling this model of business.

Talking about a great conquest we had this quarter. We were one of the -- in the finals of the Top 10 awards -- The 100 Open Startups final. So it's a award about innovation, and it's a recognition award of all our work, the work that Grendene has been doing in the start-up ecosystem. We had a program that's called Grendene [indiscernible] that tries to get Grendene closer to the startup environment. Monthly, we receive businesses, companies here at Grendene, where they pitch and we evaluate how can we relate to these startups, either through equity or through contracting their services. We haven't realized yet any types of financial investment on shares to share on that. But even though we have signed up with a few MBAs, we haven't advanced in purchasing shares. But we have a lot of contracting with start-ups as service providers. So in the item retail, the segment retail, we focus -- we are in one of the fifth most innovative companies in Brazil.

Talking a little bit about innovation and moving to our e-commerce. It has been growing quarter over quarter. We have migrated our operations of our online stores for our own Grendene management. In 2020 -- in February 2021, we completed the conglomeration of all the stores, and we have been observing a continuous growth quarter-over-quarter in the third quarter of 2022, we observed a growth of 59% on the number of sessions when compared to the third quarter of last year. The number of new clients grew 68.3%. This is the result of our investments -- strong investment in performance marketing and our objective now is to bring flow to our stores, to bring clients, to get to know our stores. And afterwards, we can convert that in purchase -- the influence of the growth of fashion is the GMV. It's a higher GMV, it's up 56.4% when compared to the third quarter of last year, general penetration of the channel is still a little bit low, but it has been steadily growing.

The penetration of the e-commerce got to 2% growth when compared to 1.5% on the third quarter of last year. And when we look at Melissa's penetration in this channel, it has a higher penetration because it has products with more higher added value. It has a different type of audience. It has an 8.2% penetration in the channel. So in the sales in the domestic market, 8.2% of Melissa sales comes from the e-commerce channel that has presented growth on the third quarter of last year. This percentage that, at that time, was 70%. And our objective here in medium and long term is that this penetration in the online channel that nowadays it's only 2%, goes up to 10%, 12% in the medium, long term. It's a penetration that is supposed to be below the industry -- the footwear industry because they are on 20% already.

But given the profile of our products that most of them are the interest of CD classes. They have a lower ticket. These products have lower penetration because when you account freight costs, for example, related to Ipanema shoes, BRL 10 of freight kind of increase a lot the costs. And regarding Melissa, which has a higher ticket -- average ticket sometimes the person buys it and has a free delivery and then BRL 10, sometimes it's the cost of delivery. And that doesn't change a lot the interest of the consumer. So Melissa and some of the Rider lines has a penetration that's higher. But when we look in medium term, the penetration should be 10% and reminding that this channel brings margins that are above -- higher margins for the company when this channel is mature.

Looking here our year perspective, we have sold to more than 245,000 clients, an increase of 101% compared to last year. We have 560,000 pairs sold, an increase of 115%, GMV of BRL 48 million, remembering that the fourth quarter is the strongest one for online sales when we have Black Friday and then we also have Christmas and Children's Day, which was a very positive date in our calendar, not only in our online channel, but also in retail. And the number of cities covered reached 4,074 cities. We are in a process of integrating our main marketplaces with Magalu, and we have integrated in the third quarter with Netshoes and Fit and now in the third quarter, we are going to integrate with Shopee, C&A, Riachuelo, Renner, Via Varejo and Zattini. So you have an idea on how this percentage of sales is in these channels, the marketplace channel has a low representativity 2% of online sales, the omnichannel of Melissa is 60% and the rest, 96% comes from online stores themselves.

Status of our Grendene global brands. I think it's really important here to talk about everything that we have accomplished in this past 9 months. Since Grendene Global Brands has been created, it didn't exist in January and from January onwards, we have structured diverse processes. So when we talk about people, what have we done in the past 9 months? We put a high-performance team together with capabilities and complementary skills of highly skilled people. We brought global rad for the digital commerce of Crocs, Nike, New Balance, people with a very strong background and deep knowledge that adds a lot of value to us.

In terms of processes, we have completed in the third quarter, the transition of our logistics operations of Grendene USA to a third party company that will actually do all the logistics of the e-commerce and also the wholesale and retail. We didn't have during the transition process, which is a very delicate process. We did not have a single stop day. The transition ran very smoothly. And now we managed to have a service level with a lot of quality where delivery times are above 99%. So the logistics of our business is running really, really impeccable. We have completed the IT structure, the front end, when we set the BI team in Portalegre.

We completed the structure of technology to serve independent channel and the connection between retail and GGB to allow the flow of orders and requests. We have structured all the processes and governance of the company. So we created committees, we have defined policies. So the processes part and systems is highly advanced. We talk about brands. We understand that we have global brands but with a local presence.

So we have finished the positioning of the brand and definition of the mix of products, and we have begun with local campaigns in the United States and in China, and this is very important to have this local cost because we have this campaigns using local agencies using celebrities and actors and local personalities, local people who speak really the language of that region and what that can bring as a benefit for GGB. The content of this is being developed locally. And of course, it had the greatest engagement that we had twice as large as we had in the past when this was not produced in a local way. And when we talk about the brand, we had many advances in terms of, for instance, Ipanema and Rider were relaunched in Amazon in the United States. Melissa is present in the main social networks, social platforms in China. So WeChat, TikTok, Douyin among others and we intend to repeat this work that has been done with Melissa to include also Ipanema.

In terms of sales results, as I mentioned in the previous quarter, this year's sale in the main channel that is, again the retail market. This reflects carried out by Grendene last year. So the results that we had in the commercial team of GGB, they're having with the retailers this year we're going to see in the next year. And what do we have as the feedback of all these dialogues. First of all, the North American market is in a challenging moment. So the retailers have a large inventory of products because during the pandemic, in the beginning, we could observe a rupture of the supply chain, and that made many retails to be without any kind of inventory to offer to their clients. And as soon as these supply chains were reestablished, as they saw a strong demand, they made larger orders, so they had high inventory, confident that there would be consumption and this consumption did not come.

So they have high inventory and this is something to be careful about. And another thing is to try to reduce the number of manufacturers, but we can see -- we have good hopes for 2023. And where can we see the reflects of GGB? In the online channel, the online channel just as it showed in the first and second quarter, a growth that is over 100%. In the third quarter, our online channel has brought 274% when compared to the third quarter of last year. When we look to the percentage of accumulated growth in the year, we reached about 180%. So in summary, in GGB, we can see a bit of the reflects of the online channel of the activities and commercial decisions on that online channel and wholesale channel, we should see the results in the next year.

But international markets, and here I mentioned, in particular, in the United States, they are in a complicated situation right now. So we project a year that can bring growth, but it's something to be careful. And here, I only want to show you some examples of the campaigns we have had in China that shows the actor -- the celebrities that appear here are Chinese people, people from that region that speak people's language, right? They have the features of the region, that's on the left. And on the right, just a couple of pictures of our product because they are again present in Amazon, Rider and Ipanema are in Amazon.

So now getting into the figures of the third quarter of 2022, I would like to begin sharing a bit of the vision we had and what happened throughout the term -- the quarter in terms of the results of the second quarter. We mentioned last time that we had a positive feeling during the third quarter because the volume of selling and sell out was increasing from January. So we had -- where we had a very weak month. But throughout the quarter, we saw there was a decrease in demand due to the challenging economic scenario, high rate, high level of unemployment that although is decreasing, it's still high. And all these reduces the available income of the consumers, and that creates a reduction in the retail sales. This challenging scenario has brought new 2 elements that's brought more complexity to this.

The first one of them is political uncertainty and the second one is the temperatures below normal in the South and the Southeast from the end of August. So if we look at the temperatures from August until now, we have seen temperatures below the average in these 2 markets, and this is very relevant. For you to have an idea here in the south, we have an expectation of frost next week. And we are in the middle of November, and we are expecting a frost. So even though in this environment of lack of trust and retraction, we have kept the number of pairs stable, a growth of 0.7% when compared to the same quarter last year, and that growth was -- the domestic market has increased in 2% and the foreign market has been reducing 5.2%. And when we take a look at the domestic market, the growth in volume has come from the Division 1 brand, which brands are these? All of the brands, except Melissa.

And when we look at the Division 1 brands, this growth is very well -- very much concentrated in Ipanema, and we were right with the feminine collection that was launched in the second semester. This collection has already sold more than 9 million pairs. So Ipanema with a very positive result and the feminine division with a very positive result. Melissa had a decrease in the number of pairs embarked in this quarter. When we look at the revenue, the revenue has grown both in the domestic market and the foreign market. In the domestic market, both Melissa and the Division 1 brands have been increased. And in foreign markets, we also observed growth. As the revenue grows 11% and the volume is 7%, we have an increase of gross revenue from 10.4% in the period.

And when we look at it in the market and in the domestic market and foreign market, the domestic market grew 9% and the other, the foreign, 14.7% in reals and 13.9% in dollars. The recurring EBIT has decreased. It reached BRL 89 million, and the EBIT recurring margin has decreased to 12.5%. These are -- the 2 main impacts on the recurring EBIT margin. The first of all is the pressure of the raw material that I'm going to show you how this dynamic is going on. This is the main impact.

And then we had an increase of operational expenses coming from higher commissions, freight, publicity and also investments that we have that we are making today that consume more resources than generate nowadays. But in the future, we believe that this will bring a higher EBIT and revenue for the company. And about the net profit has grown 45% when compared to the third quarter of '21, strongly impacted here by the financial results. So our net margin is -- was 20.3% and has come to 27.8% in the period. The net profit in the financial results have grown BRL 110 million in this semester.

So let's talk a little bit, as I mentioned about the COGS and the raw material, that's where we observed the main impact, both in margin and the EBIT margin. So what have I tried to bring to you here? How much each one of these components of the COGS represent of the net sales of the company. And here, first, you see that in the third quarter, we have an adjustment because we had a recurring effect due to the transition of the activity and distribution of Grendene USA to GGB, where the operational activities in our operator in the United States will not be longer executed.

So we had 335,000 pairs there, and these were sold either through GGB or to the clients with a price below the cost. So the revenue of these pairs was BRL 19.7 million, but their cost was BRL 21.5 million. So as this is a nonrecurring event, we have isolated these events to make interpretation -- the data interpretation easier. And just to clarify, the greatest part of this 335,000 pairs, these were pairs that were recovered from the old dealer of Melissa in the United States, and they were recovered due to open debt that this distributor had with us. So now we can analyze the components that represent the cost of goods sold.

If we take a look at the labor in the blue line represented 19.8% of the net revenue in the third quarter of 2018, 19.1% in 2019 and 18.6% in the third quarter of this year. So we have maintained -- we were stable according to the period in the pre-pandemic or we decreased in this case. If we look at the [indiscernible] is the representation about the net income -- revenues of the company. So to remind you that deprecation (sic) [ depreciation ], maintenance and energy, in the third quarter of 2018, represented 11.1%; in the third quarter of 2019 it represented 9.9%; in the third quarter of this year, 9.7%. That is to say, other manufacturing expenses have consumed a smaller amount of resources that was previous to the pandemic, not only the OGF but also labor.

Now let's take a look at the raw material. It used to consume 23.1% of the net revenue, both in the third quarter of 2018 and '19. And in the third quarter of 2022 represented 30.2% that is to say, it is an increase of 7.1 percentage points. That is precisely or very close to the -- that is -- it is that component alone that is harming our gross margin because it went to -- the third quarter this year is 41% compared to the previous years. But let's take a look about the cost of goods sold per pair. So it represented BRL 2,700 in 2018 and represented BRL 2,800 in the third quarter of this year. So it is an annual average growth of 2,059 per year. So let's take a look at the [indiscernible]. It was 150 in 2018 and 154 in this year. So that's an average growth of 0.9% per year. All these volumes they show an annual growth that is less than the pair 1 in the average. So it was 16.4% to 2026. So what's the component that grows above the average growth in the pair raw material, it…

So with these 2 graphs here that I'm trying to -- what I'm trying to show you is that the impact of our COGS and the impact with the reduction of the gross margin is isolated in the component raw material. And the other 2 components of labor and other manufacturing expenses, we are more efficient today than we were in the pre-pandemic period. Okay but it's not the raw material -- is not rescinding. Yes, it is. And here, I can show you this graph. Here, I bring the components of the PVC compound, which has the greatest representativity within the COGS of the raw material. The PVC resin between January of 2020 and September of 2022, it has grown 70.1%. So it has already receded 35.9% in this year. And its peak was in December when it reached 165.6% of growth from January to the -- January 2020 to December of last year.

So since then, it has been decreasing about 36%. And the plasticizer has increased from the beginning of the pandemic until now it grew was increasing 80%. And this year, it represents a decrease in 3%. Soy oil, it grew 106% in the pandemic and this year, it's decreased 2%. Labor in this year, 9.6%. So we are just getting the PVC compound that is the resin, the plasticizer and soy oil, among other components, but these are the most representative ones. During the period of January of 2020 until now, it grew 64.4%. And this year, it has already decreased. But our sale, this will not show the improvement in your gross margin. There are some elements here during the pandemic our median average of stock of raw material we used to have 30 to 45 days. And during the pandemic, we increased up to 90 days.

So there is a delay between the decrease of raw material costs in the market, in the quotations we have received and that kind of inflicted in our COGS. Just for you to have an IGF, our PVC compound that represented a 17.3% fall during the year. Our average inventory cost of the PVC and which is what's going to influence the COGS, it represented a decrease of 9.9% during the year. So between the price and our average cost in our inventory, there is a delay between these 2 items. The reason that explains why the COGS didn't increase our gross margin is because of the average term of inventory. Grendene has some sort of seasonality in our history. On the second X capacity and on the first half, we have a use of the factory that's a little bit smaller. So what do we do to keep the factory in a certain level of stability regarding capacity?

On the first quarter -- on the first half of the year, we produced strategic inventory, which are the products that they have no link with fashion trend design, they are basic lines. So we produce these products on the first half. And when the factory uses smaller to sell them to ship them on the second half. When this use is higher, what happens is from the 44 million pairs we ship on the third quarter, about 5 million pairs are of this strategic stock, inventory that are produced in the first half of the year, and they impose a higher cost of inventory that influences the 9.9% decrease. This EUR 5 million represent about 13% of the pairs shipped. The average term of inventory of raw materials for shipping, strategic stock are 2 elements that justify this delay between raw material prices and COGS.

And the third element the supply chains -- the global supply chains are becoming a little stabilizing. So our objective is to go back to our medium-term inventory of 30 to 45 days. We used to have a higher term. So now what we have been doing, we buy less raw materials for 2 reasons: 1, because -- firstly, because we want to reduce the average time of inventory for this levels to go down from 90% to 45%. And as raw materials are consistently decreasing since the beginning of the year, there is no point in buying a high volume of raw material because prices can decrease. So I buy smaller parcels to influence the cost. So these 3 reasons are the main reasons for the decrease of raw materials prices not being observed or influenced in our COGS. When is that going to happen? Probably on the fourth quarter, when we are supposed to have -- we are supposed to act more intensely.

We are going to feel more intensely the impact of the decrease in the prices of raw materials there. If it's not clear in the Q&A session, I can explain a little bit further about it. So I mentioned that what has impacted the COGS in raw materials and our operational expenses. I'm going to have recurring operational expenses that grew 15% on the period, 14.7% in the period. And they represent today less than used to represent at the past. Nowadays, they are 28.2% of our revenue -- net revenue when compared to the third quarter of 2018, where it used to be 30% or 28.7% in the third quarter of 2019. And why these expenses have been growing when compared to the third quarter of 2021-2022? It's firstly because many initiatives are not being done anymore.

They were not done during the pandemic like travel expenses, conventions, participation in exhibition shows, these things didn't have in the -- during the pandemic, and now they are back. They are happening again. During this period of pandemic, Grendene is [indiscernible] investing in businesses that we didn't have before and that we are investing now to be able to reap the fruit in the future. So what is GGB our e-commerce department? This department didn't exist in 2019. Nowadays it accounts on -- with 150 people. But temporarily, the online business because it's not mature enough, it will consume more resources than it generates -- it's 150 people that we didn't have before. Now we have this highly structured team ready to escalate the business further to move from 2% to 10%, 12% with an implementation in margins and expenses, if it's needed. So this is an example of the business that we have been investing on. It's been making us spend more money, but in the near future, the EBIT and revenue to the company -- they will bring EBIT and revenue to the company.

Another example, our innovation lab, the Bergamotta Lab didn't exist 1 year ago -- 2 years ago. Nowadays, it has 20 people and many projects, MVP projects as the ones I mentioned before, the franchise network of Rider, the Melissa Love Spot, which is that franchise the autonomous one. We also have other projects that I didn't mention to address the pet market. We are developing what I say products, the leash, smart leash for the pets. It is smart leash for dog and cat owners to monitor the activities of their parrots, how long this pets have walked leaking, scratching themselves, drinking water. It's a product that will try to address a market that has a BRL 51 billion value.

And the thing about this product is that it will impact on the sales of this product and recurring through a signature because to have access to the app, you need to sign up. So this project will -- we have talked about it in the -- in our platform called Catarse to test it if it's attractive or not. And it was really well succeeded this project. So we have another project for the pet segment that are fitters and toys, we see very different material to address also this market, this pet market, which is huge. But all these projects have been tested. And we know that -- we don't know if they're going to become scalable products. But if they become, they have a huge potential to bring revenue and EBIT to the company. These are just some of the projects we have been doing at the Bergamotta Labs, they temporarily consume more resources than generate. This theme is our P&D of the pharmaceuticals.

This is the one-off Grendene. And other doubts -- I mean costs regarding publicity, there is low historic levels, but we are investing in the strengthening of our brands. We hired the senior -- to be our spokes growth of the Ipanema collection, [indiscernible], always new. So these are initiatives, our brands. Publicity costs are a little bit higher, but they are still below the 6.4%, 6.5% that we used to have before the pandemic. So this is the scenario of the third quarter. When we talk about the accumulated results in the year, the volume has grown to BRL 104.6 million. In the domestic market, the accumulated volume went down 2% and the foreign market has a growth of 16%.

I just would like to remind you that in the first quarter, it was a very weak quarter. The volume in the third quarter of the domestic market went down 30%, and we have been recovering it -- from it throughout this year. Just reminding you that why did we have a weaker third quarter? Because firstly, sales were -- Christmas sales were below expected to avoid readjustments in December that we announced. And thirdly, because the comparison basis regarding January '22, the revenue -- gross revenue increased 15% in the period. internal market, domestic market increased 13.7% and external 18.6%. That shows we are presenting a growth in revenue in the domestic and external markets, especially here because of price readjustments that we did in January, February this year. The recurring EBIT of the accumulated this year had a similar behavior of the third quarter. It will decrease 36%, and the margin for 3.4% to 8.7%. The recurring profit will grow because of the financial results that had a good performance in this 9 months -- the first 9 months of this year.

Here, I will briefly go through because the behavior is the same, like labor and [indiscernible], they are always stable regarding what they consume from the net revenue and raw material, we'll have higher representativeness 8 percentage points when compared to 2018. Same thing with the indicator labor, pair -- where raw material, we have the highest growth, either in an average annual growth of 19.9% during the year when compared to the gross revenue, 5.8%. The expense -- operational expenses that are recurring, they grew in regarding the last -- third quarter of last year associated to -- what I mentioned before, it's the same for the accumulated of the first 9 months. But we still are lower than the pre-pandemic period where operational expenses used to be 32% or 30% of our revenues -- operational revenues.

Talking a little bit about our portfolio that we call investment committee that we approved in the end of 2019 to invest in assets that are on traditional banking and federal resources, this portfolio ended the quarter with BRL 481 million. 80% of this portfolio used to be on the sub-portfolio of real estate development projects, 11% in variable income at Vale do, he represents 11% of this BRL 481 million. We used to have a position [indiscernible] throughout the quarter used to be our highest position about BRL 100 million. But we don't have anything -- we don't have that in March since it's lowering dividends. And the other investments of the portfolio are the ventures and [indiscernible]. How is the development -- the performance of this portfolio since the beginning? The complete portfolio has the profitability of 92% in the period, which is the same as 452% of CDI. When we're getting to this portfolio in detail, the projects and real estate. -- grew 44%, representing the private equity portfolio grew 226% of CDI and variable income, 358%, which is the same and 1000% of the CDI.

Talking a little bit about dividend distribution. The net result of the period was BRL 365 million. In this BRL 365 million, EUR 152 million. come from fiscal benefits, and they have to be storing reserves, BRL 213 million discounted 5% of legal reserves, BRL 10.6 million. We will have to distribute BRL 202.4 million, as we have already distributed BRL 109 million in the first and the second quarter. We have left to distribute BRL 93 million. So how are this BRL 93 million is going to be distributed? BRL 59 million will be dividend, BRL 34 million, [indiscernible], BRL34 million gross, we deduct 15% of taxes they will become BRL 30.9 million. So we will pay $0.10 per share for the shareholders that had shares in the November 3. And then from that date, onwards they will become ex dividends, and we will pay down on the 23 of November. So that's the graph I like to show the accumulated of dividends paid since 2004. The amount of BRL 4.4 billion since we opened our capital.

What I had to say at the moment is that. So I would like to start the Q&A session. Thank you so much.

Operator

[Operator Instructions] We'll have our first question now. It's coming from [indiscernible] from Bradesco BB.

U
Unknown Analyst

I would like to ask about the master franchisee -- master franchise, what do you think is going to be the effects on the operation as a whole?

A
Alceu de Albuquerque
executive

Thanks for asking. I'm not going to give you any quantitative data, I'm just going to explain the dynamics. Nowadays, as I said, we have 394 franchises. The master franchisor receives commission in the selling for this 394 franchises. The contract we have with the master franchisor is that -- says that in the end of the contract, we will still pay commission on the selling of those franchisees with less of more than 5 years of existing and -- or they are going to renew their contracts. So when in February, when they end, the contract, the 394 franchises that we have nowadays, about 216 -- the commission of 216 franchises of the master franchisors would receive, they are not going to receive this commission. So what's the dynamics?

So when I internalize this process, firstly, the biggest objective is not finance, it's not regarding to finance. Even though we have financial gains, the main thing here, the main game is proximities, you're getting closer to our final consumers. And also with the franchisors -- franchises, sorry but they are going to -- we are going to have financial gains because the reduction in these commissions that we pay to the master franchisor is higher than the increment we are going to have with expenses to structure the teams here.

So when this process is complete, and it's only going to be complete in 5 years after the end of the contract. And why 5 years? Because if the master franchisors opens a store or captures a new franchisee, they are going to still receive money until it makes 5 years' time. So from March -- onwards from March this year onwards from the 394 stores we have today, 216 stores, we will stop paying commission on those. I don't know if that's clear. And for you to have an idea of how big is this impact, when this process is complete, we are going to have gains of 3% or 4% of net operational revenue of Melissa in this business because reduction of expenses and commissions will be higher than increments with the expenses with the team. I don't know if that's clear?

U
Unknown Analyst

It's clear.

Operator

Next question is from [ Will Hermes ]. He is asking 2 questions. Could you talk a little bit about the sales in October? And secondly, about costs, can we expect a change in the high COGS trend in the fourth quarter of '22?

A
Alceu de Albuquerque
executive

As for your questions, starting with the October sales, as you know, Grendene products -- Grendene takes the orders to produce. So the sales in October were penalized of the sellout in retail and distributors. What's the dynamic we have observed here? The sellout of the distributors of the retail channel, they started increasing throughout the year. They grew almost every month, excluding January. But from February onwards, the sellout industry channels increased. And the first negative sellout when compared to the same month last year, it was September. And why it happened?

Because in September, we are having like political uncertainties and temperatures below expected in the South and the Southeast. And when we look at this drop, it is concentrated in the South and the Southeast this drop in sales. So with smaller sell-out sales, our clients kind of started to not place their orders. And even though they have less inventory levels when compared to other years, they are waiting until the last minute to place the orders. In October, we can see the orders we are receiving now, we can see an improvement and a recovery, a resumption in sales. The October sellout shows a very good recovery. The second thing was regarding the margins. We expect that if the scenario we have projected of implementing volumes, maintenance, price maintenance of our products and raw material prices, if they continue decreasing or if they remain stable, yes, we are going to see a recovery in margins, a very positive one.

Operator

Next question comes from Wagner Salaverry.

W
Wagner Salaverry
analyst

I have 2 questions. The first question is with the internalization of the massive [indiscernible] on your lease side, I understand you have seen a need for that change. I wanted to understand, considering you have already visited some of these franchisees and you are accelerating this process. Is it more clear that the opportunities is in having a stronger online campaign in different franchises.

Will you act more on the consolidation, maybe change the owners of some franchises to accelerate the opening of more stores? Do you have a clearer idea about this? And the second question is considering the resources of the company and also the dividend payment policy, the election environment says that both will probably have taxes on dividends in 2023 or at least their proposal goes in that direction. So I would like to understand if the -- if you have already indicated some change in policies considering the dividend and considering this accumulated cash flow or is this still in standby with no change questions?

A
Alceu de Albuquerque
executive

I'm going to begin with the second one, and then I'll go to the first. So yes, we have this scenario of tax over the dividend. We are -- first, we are waiting for clearer definitions and then we're going to assess this in a more concrete way to see what are the alternatives. In this sense, as I mentioned, in previous periods, we have 2 losses that are going on. And if we succeed, it will allow us to distribute part of this cash flow without having any kind of taxes or if there is any kind of tax, it will be by sustaining instead of taxing 34%, we will have 15% and 25%. And what is the situation of these lawsuits? The first lawsuit that we have that I'm going to mention is the one that says that we could distribute the fiscal tax incentives in the state level without any kind of taxes.

And I'm going to read here the situation, so you understand. Grendene had a favorable -- partially favorable sentence. It presented -- contested and it was accepted, and we have proceedings with our request in Grendene. The union asked for special resources for the superior court and it was not admitted. And nowadays, we -- the process has an open deadline. So the union can contest this. Therefore, we have been successful. The Federal Union has contested it. We have also -- we won our parts and the union has not. So now we are just waiting for the legal deadlines. And the second lawsuit that says that we could distribute cash flow, but instead of paying no taxes, we would make the [indiscernible] index, where we have a reduction of 75% of the tax and we add source of contribution. So we would leave a contribution of 34% to 16.25%.

So what's the decision of the court? The court understood that a decision in lawsuit 1, the one I mentioned before, would bring effect to this process and determine the suspension of that until the lawsuit #1 received a sentence. I'm not sure if that was clear. So we have some lawsuits that are being attended to, but we depend on legal procedures. And regarding ourselves without the legal universe, let's say, if we have approved this year in the case of Bolsonaro being elected, it will increase the probability of sharing the taxes on dividends. And then we could start distributing dividends regarding the month of October and November as we did last year. So that would be the #1 answer.

And #2, regarding the franchises network, the greatest opportunity we have is in management that is closer to the franchisees. So we want to help our franchisees to improve their trading, the marketing cost, the cost of occupation. So help them manage better their purchases. So we have to show them this is what is selling more. This has more sales potential. And then when we improve the purchase process, and we make this more efficient for the franchisee, they will have the least investment in capital.

So when we help them negotiate this, we increase profitability of this model. And when we are closing to the franchisees, we can also better capture the trends in the retail market. So we see some opportunities. Yes, we do. And we have some business plans being developed and some that are ready. And I would like to remind you that we are going to anticipate the management of the franchises from February to November this year. So I think that's it. I'm not sure if I answered your questions.

W
Wagner Salaverry
analyst

Yes, you did.

Operator

So we would like to finish now our question-and-answer section, and I would like to give the floor to Alceu de Albuquerque for his final consideration.

A
Alceu de Albuquerque
executive

So once again, thank you very much for your presence here. In case you have any additional questions, our team is completely available for -- to answer your questions. So I wish you a great day and this webinar of Grendene SA is finishing. We appreciate your participation. Have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]