Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone. Welcome to our video conference for the results of the fourth quarter of 2022 of Grendene S.A. I want to remind you those who require simultaneous translation that we have this to available on the platform. To access, simply click on the interpretation button through the globe icon at the bottom of the screen and choose the language you prefer, Portuguese or English.

Anyone listening to the video conference in English, you can change the original audio. You can just choose the mute the original audio. We will tell that this video conference is being recorded and it will be made available on the company's website ri.grendene.com.br, where you can also find all the press release materials and the complete materials. You can possibly -- you can download the presentation from the chat icon.

[Operator Instructions] We emphasize that the information in this presentation, as well as any statements made during the video conference concerning the business prospects, projections and operating and financial targets of Grendene SA are based on the company's management's beliefs and assumptions as well as information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties, assumptions because they refer to future events, and therefore they depend on circumstances that may or may not occur. Investors should be aware that general economic conditions, market conditions and other operating factors may affect the future performance of Grendene S.A. And the result is substantially different than those stated in such forward-looking statements.

Today we have the following of the company executives with us. Rudimar Dall'Onder, Chief Executive Officer; Gelson Luis Rostirolla, Chief Operating Officer; and Alceu Albuquerque, the CFO and Invest Relations Officer. We also have all the company's key managers present.

I will now give the floor to Mr. Alceu Albuquerque. Please Mr. Alceu, you can go ahead.

[Alceu de Albuquerque, executive]

Good morning, everybody. Thanks for your presence in our video conference for the release of the results of the Fourth Quarter 2022 and the year 2022 also. So it's a pleasure being here with all of you.

Today, I'm going to start talking about a little bit of our performance of the -- our e-commerce that's had an excellent performance and a continuous growth presented since August 2020, when we started the project of migrating the online stores from our external market for Grendene's own management. We had a growth in all the indicators. Volume of sessions grew 49% in the quarter, reaching 21.2 million sessions. The number of single users grew 20.58% (sic) [ 25.8% ] GMV, 23.9 million, a growth of 46% when compared to the fourth quarter of 2021. And regarding the penetration of the challenge on the internal market sales, it grew 2.1 percentage points, leaving 4.1 percentage points in the fourth quarter to 3.4% on the fourth quarter of 2022.

When we look at the penetration of Melissa, that has products with more value added. The products with a freight that a cost of delivery that doesn't impact the total cost of the product, because the freight costs are free, because of the total value of the company is a little bit higher, so penetration of Melissa on the sales of the internal market, it's 9.6% and all the results we can observe here on the fourth quarter and in the year, as I'm going to show you on the next slide, is a result of our investments on this channel.

For example, the investments in performance marketing, we more than double up the percentage related to the nor on the fourth quarter of 2021. We invested in the year of 2021, sorry, we invested 5.9% of our net revenue generated of the GMV on the online channel and performance marketing. While in 2022 this percentage was just 11%. We are investing more in performance marketing and we are investing in our team, which is composed for over 120 people nowadays.

And this channel, we believe, it has a high potential of growth. When it's mature, it's going to reach 10% to 12% of penetration. When we look at the numbers of the year, we sold our products in all our stores for almost 500,000 clients, a grew of 90%. We sold 800,000 pairs that was up 85%. GMV was about BRL 70 million in the year, a grew of 80%, and then, we're also increasing 15%. We served 844 cities -- we had cities covered.

When we look at the penetration, it went 1.1% penetration, it left 1 -- now it's 2.9% general penetration, and Melissa's penetration from 8.4% to 9.2%. So we can confirm what I mentioned before that our investments in performance marketing, adding experience of the consumer experience in teams and training is demonstrating results.

And as I mentioned before, this presentation in the year was 2.9%. We believe that in the average and long-term, it's going to be 10%, 12%. It's a very important channel to us, because we can get closer to the consumer through it. We can learn and capture trends easily through this channel. This channel will give us information about the consumers, besides being a channel that will give us more margins, because the company is selling directly to the consumer. We eliminated the mark-up of the distributor of the retailer.

In our next slide, we are going to talk a little bit about the landmark of Melissa that we overcame on the quarter. The number of 407 clubs, I mean, in January, we are going to be -- in December 2021, we were 390. So now we have 17 clubs, extra clubs. This is the channel that represents Grendene, the most abroad. It represents 60% sales at Melissa for the domestic market. Melissa has a huge penetration, it reached 9.2% on the fourth quarter. And the stores, they are extremely important to us for the online channel because of the omni-channel clients can buy online and can also go to the stores to pick the products. This landmark of 407 clubs reached. We also started the project of internalization of the franchise network of Melissa.

As we told before from June 2022 onwards we announced that we wouldn't renew the contract with the master franchisor. So from January onwards, we assume this management, this administration, we have people working very focused on the improvement of the services for our franchisees, capturing the -- having feedback from all the franchisees since June and up to now.

And the structure is ready to escalate. And this internalization of the franchise network is really important for us to get closer to the franchisee and the final consumer, as well as in the online channel to better capture this trend. Also we have financial gains in this operation. We believe that in 2 or 3 years, this operation is going to add about 3% or 4% at EBITDA of Melissa because the cost of the internal structure that we had, it's inferior to the commission percentage we use to pay for the master franchisor. So -- and apart from having qualitative gains, we also had quantitative gains with this project.

Now, talking a little bit about GGB. In 2022, we had like a construction year for the company. I don't get tire mentioning that this company came out of nowhere. It received strong brands, but it didn't have any structure, it didn't have people team or a physical space. So during 2022, we hired people a very highly qualified team. We established processes, governance of the company. And now we've got teams in the United States, China and in Brazil, all of them integrated with the structure and very clear targets defined for 2023.

We kind of expanded throughout 2022 the distribution of our products. And these products nowadays, they can be finding retailers that were not present before. For example, you can find nowadays, Ipanema selling at Macy's a huge retailer in United States. So we had many, many advances on 2022. We transferred Grendene Shanghai to GGB in the end of the fourth quarter, and we also transferred all the distribution from United States to GGB. We have a new logistics operator that is showing a higher level of efficiency regarding logistics and in orders of wholesale. We have many -- we had many advances.

Another result that is possible to measure now is the performance of the online channel, because it's more direct, it's more immediate. The GGB team builds actions, improvement actions, and we can see the growth happening on this channel. So on the fourth quarter, the revenue increase was 658%. And when we look at this performance throughout the year, it was 282%. So it's important to notice that it's not isolated, it's a growing growth.

The first quarter, we had 146%, and the second, the third 274%, and on the fourth quarter we had 658% growth. It's very important to show that it wasn't just regarding volume and revenue, but also other indicators that are important on -- for the online channel. The website traffic, it grew 66%, when compared to the 3 quarter of 2021. The conversion rates 1.28 (sic) [ 1.8 pp ] when compared to the fourth quarter 2021. The volume grew increased 700%, and the number of orders also. Not only revenue increase, but also all the indicators that demonstrate a constant growth in the -- on the channel.

And we can see great opportunities ahead in 2023. We have a structured team and now our focus is to strength all our brands and to sell. So what are the opportunities? The new Melissa retail, the GGB team together with the Melissa team, we are developing a new layout for the Melissa stores that's going to be implemented in Brazil and in United States. It's a layout -- in-store layout, where we can -- we want to achieve a global recognition for the brand through it.

We are also supposed to launch Melissa's e-commerce in April. It's going to be our second online e-commerce. We just have one now in United States. We have opportunities to grow with Ipanema at Amazon, and opportunities to open new retail accounts with Ipanema. Together with Ipanema, we had the Cartago and Zaxy flows. We are also going to open 4 kiosks of Ipanema in Florida, where high -- places with high flow of people that are going to help to strengthen the brand identity in the region.

We are also going to intensify marketing actions in United States of Melissa and China. In United States with digital influencers. And in China, we've got our influencer with a high level of recognition and followers on platform. So this is one of the strategies we are going to use to strengthen our brands internationally. What are the challenges that we are -- we face on 2022, and we are going to probably face on 2023? The global economy kind of decreasing a little bit. China and United States are part of this scenario. We can see high volume of inventory.

The retailers are delaying and postponing orders, and many times giving this risk of high inventory, giving that to the manufacturer. Sometimes they made the sales, but who delivers and who ships it, is the manufacturer. So the inflation scenario is quite challenging. It's a global problem. Retailers with high levels of inventory, trying to reduce the number of manufacturers, supplying and transferring risks of high inventory. It's a very challenging scenario. But yet, we are -- we can see a strong growth happening in the year.

COVID and the Chinese New Year's kind of hindered the performance. COVID in 2022 and COVID in 2023, it's in -- in China. Maybe we will start to work a little bit more actively in China from now on. We have a very strong influencer hired to work for us from China, and you will see the new -- marketing actions happening.

Before talking about the numbers of the fourth quarter, I would like to give you an overview of the quarter. The first quarter was a little bit more challenging that we expected. Even though many of the elements were in place, we knew them before, such as high inflation, high interest rates, unemployment rates that -- it's changing, but it's still high. And a high level of that kind of compromise the revenue available of the consumers to buy non-essential items.

And temperatures below average in the South and Southeast -- the rainy season above average in the South and Southeast, ended up compromising a little bit the sales for the end consumer. And in the end, an element that we had it mapped before, but it's still lasting, is regarding political uncertainties and economic uncertainties. Before the elections, regardless of the candidate who would win it, we would have -- life would go on. So what we have been observing up to now is that, our clients, distributors and retailers -- they have -- they kind of have a very high level of [indiscernible]. They don't have certainties about politics. What -- they're waiting to see what's going to happen from now on.

And what does that influences to us. It reflects on our sell-out and sell-in, what could we observed in our brands? Melissa, for example, there was a sell-out of 12.6% inferior decrease compared to last year even though the sell-out had increased 8.7%, the sell-in of the brands of division went down 12.6%. If you check -- if you observe Clubes -- Melissa Clubs sell-in minus 12.6%, sell-out is a little bit less than the sell-in. The sell-in went down minus 17%. So sell-in received 12.7%.

So I'm trying to tell that our distributors and retailers, they have levels of inventory that are lower than last year, which has been hindering our performance on the fourth quarter. They are working with 30 days less -- left for inventory. It's a month with less sales. Check the performance during the year. The performance is better than the selling. Melissa Clubs grew 6.5% -- 5.6%, sell-in decreased 5.7% -- 3.9% sorry, and sell-in decreased 5.7%. Here, I can demonstrate that our distributors, retailers are working with less inventory.

We still don't know if this trend of working with smaller inventory is something that has -- that is going to continue due to better cost opportunity that used to be 2% and now it's 13.75%, or if it is a result of a better learning, where they have learned to manage their inventories best or if it is a result of being afraid of losing sales due to not having inventory and they prefer that then to have obsolete inventory in case they don't sell or maybe this could be just a temporary behavior that as soon as the political and economical uncertainties disappear, and we do believe they will disappear, that will start to fill in their inventory again.

So we understand that this second option is the one, the most probable one. So we believe that throughout the year, all the retailers and the distributors will fulfill their inventories. So let's make an analogy, if 2022 was a month of -- an year of 11 months of sale in Grendene. Why 11, because they reduced in about 30 days their level of inventories. So if this is so, 2023, since we believe that our clients will recover their level of inventory as soon as these uncertainties disappear, maybe 2023 could be of 12.5 months of sale or maybe 13 months. So maybe we believe that throughout the year, we will observe resolution in the inventories.

So let's get into the results of the year. So what was the result of the fourth quarter. The volume was down 14.9% with 43.6 million pairs. In the domestic market, it was 13% and in the foreign market it was 20.9%. The gross revenue was stable, down 0.9% with a total of BRL 938 million. In the domestic market, it was -- the revenue was up 2.5%, and this is a reflect of a greater gross revenue per pair in the fourth quarter of 17.9%, result of 2 factors. First, a price adjustment. We did this in February 2022. And second, selling products with greater added value.

For instance, we opened the store at Copan. And this retail store, the average price of the product is BRL 200. So the energy is a line that is growing. So just an example of one of the lines that we are creating and focusing on that have a greater added value product. Ipanema itself had an increase in gross revenue, although a reduction in volume. But they increased their revenue of 2.5%, because besides selling the flip-flop to sandal and the slight gain representativity in the sales from Ipanema.

So instead of selling a flip-flop for BRL 19, we are selling a sandal with BRL 29 or another one BRL 39, so you add revenue for each pair. The products of EVA had an excellent result. EVA is a product with greater added value. It is lighter, it's more comfortable, and that's a trend we have observed. So this focus on greater added value products has contributed together with the price readjustment to compensate the increase and the raw materials price. That helped in the domestic market. But in the foreign market, the -- there was a down of 10.3%, because we also had an increase of the gross revenue per pair in reals of 4.3% and in dollars of 20.6%.

The recurring EBIT went down 25%, it reached BRL 132 million as a result, mainly of the impact of some operative expenses, such as investments we are doing right now, as I mentioned in the third quarter. That will have results in the future. And we had an impact of workforce in our CPG. The recurring EBIT went from 22.3% to 17%. But recurring net profit achieved BRL 209 with 29.6% in 2021 compared to the fourth quarter of 2022 of 27.4%.

Here, I'm not going to mention each one of the details, but I can show you a gross revenue that down 0.9%, the net sales revenue from [ 43% to 45.9%. ] Operational expenses grow from 21% (sic) [ 25.1% ] of net sales to 29.4%, but they are very concentrated in the last 3 lines, other operational profit revenues, expenses. And this equity accounting is more than GGB. As I mentioned, the recurring EBIT reached, excuse me, BRL 132 million that's decreasing 25%. The financial result -- revenue is stable, it reached BRL 56.9 million and net profit reached BRL 202.6 million.

Here I'm showing the variation of the gross revenue and the volume produced BRL 146 (sic) [ BRL 143.4 ] from the gross revenue, the price and mix added BRL 148. And the exchange was more value than removed [ BRL 14.2 million ] from the gross revenue. When we go into the COGS, it was down 1.4% compared to the fourth quarter in 2021, but all the components except labor showed a growth -- sorry, a decrease that was greater than the net sales revenue. So raw material is one of the main components of COGS. That was pressuring this -- putting pressure in the COGS into last year.

The third quarter seems to be the point of change. From now on, we should perceive the decrease of raw material in the market. The COGS of raw material was down [ 3.2% ] and COGS in labor went up 13% to the operational expenses. I'm going to show you this later. The smaller volume of sales impacted the contribution of COGS on the net revenue, which I show on the right.

About net sales revenue, raw material was down 1.4%. And I'm going to show you in the next slide, this is in first -- this is the first quarter from the beginning of the pandemic that the COGS on raw material represents less in the net sales and it represented in the previous year. So let's see the fourth quarter in 2022 represented 27.1%, which is 1 percentage point down compared to the fourth quarter of 2021. In the third quarter in '21, it represented 30.8%. In the third quarter '21, that was 21.4%. Second quarter, 31.9% this year compared to 27.3%.

So the fourth quarter -- between the third and the fourth quarter, we had this changing point, where the raw material has decreased throughout 2022, but considering the exchange and the price to have inventory price, we have kind of a loss here. So, this timing happened in the third quarter. And here, you can also see -- we still have space to see the reduction in representativeness of raw material in the net sales. Because our inventory average cost of the PVC compound is about 11% greater than the reposition cost. So the reposition costs -- so we can rebuild our inventory is smaller than what I have in the accounting as an average cost. As we buy more raw material, my stock average cost will be reduced and that will impact on COGS.

So the representativity of the raw material has receded here, the OMS has reduced 0.6 percentage points, and the labor was the only one where we have seen an increase and that is due to the operational impact. So a smaller volume of products that you can reduce your labor costs even if you -- if we are dynamic if we are efficient for adjusting the labor to the product -- to the production value, it is not an immediate impact. Even in the fourth quarter, we have created actions to adjust our factories. We have reduced workers' temporary and permanent positions. Temporary, usually throughout the third quarter, we hired temporary workers, because we have a greater volume in the factories. And we will not hire them again when it's not necessary and that increases our efficiency.

Here I show you a little bit about the raw material movement throughout the year. You can see that our main factors of raw material have decreased throughout the year. The PVC compound which is the main one, has receded 26.6% and the PVC resin that is a compound for the PVC compound, it has decreased 43.2%.

About operational expenses, when we see the commercial expenses, they grew 0.8% in this period. Most of the commercial expenses have decreased in this period, except advertising that was up BRL 6 million, that's 20% up. And that's because we are investing in advertising again. Before the pandemic, we invested 6% of our net revenue during the pandemic that went into 3.3%, and now in the fourth quarter, we invested 4.8% of the net revenue in advertising when compared to [ 3.8% ] in the fourth quarter of 2021. So the main impact here in commercial expenses was advertising, then we had an increase of -- in a [ BRL 1 million ] of freight expenses.

In the administrative expenses, it is more in terms of labor and then other operating income. We have a series of small expenses. I'm going to mention some of them. The main one is the initiation of the investments into transference of Grendene, Shanghai to CPV. Then we also have management of franchises that are included here. The management of franchisees, the structure I mentioned about the franchise network of Melissa. Here I show you the variation of the EBIT, what were the main points that impacted the company's EBIT. And here it is specifically GBV of labor, as I mentioned. And here advertising that went up BRL 6.1 million throughout the quarter. We have in our demonstration, information, all these figures.

Now getting into the results of this year. We've reached 148 million of pairs cent. That's a decrease in fact we're -- in the domestic market it reduced 5.6%, and in the foreign market, it up 2.9%. That was concentrated more in the first quarter. The gross revenue went up both in domestic and foreign market, in domestic 10.1% and in foreign 7.9%. And with that, the total gross revenue went up 9.6% that is BRL 3.11 million.

The recurring EBIT went down 31.5% in the year reached BRL 284 million, and the recurring net profit was 17%, and went to 11%. The net profit went up 13.2%, as the recurring EBIT went down 31.5%, the recurring net profit went up 13.2% due to the financial results we had throughout the year. And with that, we had BRL 613 million, and net profit from 23.1% to 24.4%. So here again, we have the gross revenue growing 9.6%, domestic market 10.1%, foreign market 7.9%.

Over to the CPV and the COGS grew from 56% to 59%. Operating expenses were up 20.8% going from 27.2% of net sales to 30.6%. And with that our operating result was BRL 224 million, which is a decrease of 31% when compared to the values of 2021. And the recurring net profit reached BRL 613 million. Here I'm showing the same graph that I showed for the fourth quarter, I showed for the year. So a variation of 29% of net -- the gross revenue came from price and mix. The volume removed BRL 101 million from then, and due to a stronger dollar exchange went down 33 -- removed BRL 33 million from the gross exchange.

Here I'm showing the same graphic for the COGS. We see on the right that throughout the first 3 quarters, we didn't see any impact of the reduction on raw material. But on the fourth quarter, as I showed you before, we can see this -- but throughout the year raw material still represented more than it represented in 2021, 2 percentage points more. OMS (sic) [ OMC ] is quite stable and labor was up 1.9 percentage points here.

Operational expenses, we have several of investments that I mentioned throughout the year that are being carried out in the commercial activities. We have all the e-commerce activities, 124 people. We have a big amount of team that is 25 people team. We have the reinvestment and increasing investment on advertising. So many different initiatives that still do not generate results. They still have not reached their mature level, but the structures are ready and fit to offer this growth. So whatever that comes as a revenue, will not be proportional to the increase in expenses.

And even in sales expenses, the 3 main -- sorry, the 2 main lines that increased was a freight and advertising that was up 34%. In general and administrative expenses, the main increase here is in labor and other income and expenses is similar to what I showed you in the fourth quarter. We have the COGS, we have an impact of the operation transfer [indiscernible]. We had a reduction in inventories. So these are the main impacts. Most of this group is a non-recurring item.

Here again, I'll show you one of the main variations of EBIT. So, if we look at the 3 components of COGS, these are the main variations, besides the net revenue that removed BRL 18 million from EBIT. COGS was [ BRL 17 million, ] so labor BRL 16 million, OGF BRL 15 million and advertising BRL 14.2 million. So we have other commercial expenses that are the sum of different small expenses.

Talking a little bit about our investment committee portfolio. It has been reducing and the trend is to reduce even more throughout time. Our portfolio started with BRL 581 million highs. From this, 6% was in private credit debentures, 13% in variable income and the only action we have -- a share we have from the beginning was -- the value of those is the only share we kept. [indiscernible] historical profitability seems from 2019, 2020. This portfolio kind of generated 392% of CDI, the Securities and Exchange Commission 270% CDI, private credit, 50% profit, equivalent to 217% CDI, and variable income, 1,133.9% CDI. As I mentioned before, this portfolio tends to reduce in the medium-term, even because we are going to say -- we're going to tell you now about the dividends, extraordinary distribution BRL 1 billion of net with reduction of fiscal state taxes.

When we realized in 2019, last year, we had a lawsuit that recognizes that Grendene doesn't have to include the values coming from financial benefits on the basis of calculation of the tax. What's the practical effect on that is profits -- past and future profits related to the fiscal benefits given by the state of Ceara. There we will start being distributed to the shareholders without any restrictions or risks of being deducted by the taxes and social contribution. What's the incentive that we used to have in our accounting on the 31 of December? We used to have BRL 1.819 billion.

How is that divided? From this BRL 1.800 billion, BRL 1.584 million are reserves from ICMS, from tax on the movement of goods and services and the others are benefits from exports, according to the initial we started elaborated by [indiscernible] partners. The decision -- it doesn't make it clear if the decision -- it will involve Provin and Proapi, because during the beginning and the decisions that we're taking in certain moments, we talk about in fiscal benefits given by the state of Ceara in a very wide way.

And sometimes, we talk about specifically of Provin. So the recommendation of our advisors -- legal advisors is that this BRL 235 million, it can be distributed, but it has to be discussed. So the recommendations that the company files are new legal recommendation for this benefit specifically that can be recognized. So what do we have as net profit that's certain we can share BRL 1.584 billion. From this amount of money, the committee approved -- we distributed BRL 2 million in 2021 so these amounts are not -- doesn't suffer any reductions of taxes.

And now, we approved the distribution of BRL 1.004 billion growths from this reserve fund. Why BRL 1.004 billion, because we have issued that legal reserves from this amount, 5%. And as the company had already reached the limit of 20% of the share capital for the limit of the balance of the legal reserve, from now on Grendene doesn't need -- that this amount to future distributions. Why? Because, we have reached our legal limit of 20% in [ integralized ] capital. So the gross amount should be BRL 1.054 billion. But as the limit should reach this amount was regarding [ BRL 4 billion. ] So gross amount is BRL 1.004 billion. BRL 1 billion is the net amount.

And the balance from the incentive reserve -- legal reserves is, the balance left is BRL 577 million, that in the future, the council will -- the General Meeting will deliberate what to do with this amount of money. The results of the 2022 is BRL 568 million. From that BRL 234.4 million is incentive reserves. And it makes up BRL 233 million reducing the amount until we get to the limit of 20% of the integral share capital.

We have to discount BRL 16.6 million from the calculation basis, which left us a net amount of BRL 316 million to use. This results from 2021, but the committee suggested extraordinary distribution of this amount, BRL 1.004 billion discounting legal reserves of BRL 4.5 million, the total of dividends proposed from 2022 is BRL 1.316 billion. As we have already paid BRL 202 million throughout the year quarterly, as the company always does, we have a balance left to distribute of BRL 1.114 billion that will be distributed. According -- while the shareholder that have Grendene shares [ GNR3. ] This person will receive, as I'm going to say, BRL 1.4 million, that corresponds to [ BRL 1.21 ] per share by dividend, and BRL 110 million for [ JCB ] for interest and equity IOE.

When we did that taxes on source, this amount becomes BRL 103 million equivalent to BRL 0.10 per share. So they will receive this BRL 1.21 per share, the shareholders that have shares from 12 May, 2022, and the payment will be from -- in 17 May, 2023, right. So, and with that, I'm only going to show you the amount of dividends we paid since the opening of our capital. So since we went public, since 2004, it's BRL 5.6 billion. What I had to say in a very summarized way was that.

And now, I'm going to open for questions. Thank you so much.

[Operator]

[Operator Instructions] Let's go to our first question is from Wagner Salaverry, an analyst from Quantitas.

[Wagner Salaverry, analyst]

Firstly, congratulations for the CFO position, it's well deserved. And my question is the dividends that you are proposing to pay, that's going to be paid in May. It's going to be relevant from the structure of the company. So the company used to have a very relevant reserve account, and that's going to have a bit of an impact on a daily basis of the employees. Well, how can you -- how can -- do you intend to work with this structure with share capital or in smaller volumes of net cash? And if in a way we are going to have a difference regarding deadlines for clients suppliers, if you -- if that's going to change those factors?

[Alceu de Albuquerque, executive]

I'm very happy with this promotion and very helpful being recognized and the trust that was deposited on me, especially from Dall'Onder and Alexandre, my colleagues, the other Directors. Regarding the day today of the company is not going to distributing anything this influence -- this distribution of BRL 1 billion, it's not going to influence the structure of capital of the company. We are going to continue paying our clients, our suppliers and we are going to give time to our suppliers to pay. We had a BRL 1 billion cash. And in practice, that's not going to influence on anything in our management of cash flow.

[Wagner Salaverry, analyst]

Regarding GGB, I would like to understand from you, you have shown your scenario. It's a little bit difficult abroad, we can see that. But being what you have planned for this year from your basic scenario in the end of the year. Are we still going to have GGB on the fourth quarter of '23, with a bit of cash flow usage? Or are you going to have the breakeven?

[Alceu de Albuquerque, executive]

Our approved budget considers and expand of money in 2023. We are going to have interest on equity, and from 2024 the operation will reach the breakeven point and it will start generating cash flow.

[Operator]

Let's go to our next question. [indiscernible] investor.

[Unknown Attendee]

The idea is to distribute future dividends with fiscal incentives 100%?

[Alceu de Albuquerque, executive]

This question, I don't know how to answer you, because it's a decision that the Board is going to make. As you've seen yesterday, we approved a new dividend policy that brought you outrage to changes that from now on the minimum mandatory dividend is 25%. And besides it, the dividend policy is started to include the fiscal benefits from the state in the dividend calculation basis. So they will start to be part of the calculation basis. But how much of the amount is going to be defined by the Board of Directors quarterly.

[Operator]

[Operator Instructions] Our next question comes again from Wagner Salaverry.

[Wagner Salaverry, analyst]

Also, please, if you can tell us a little bit about your perception on the beginning of this year, regarding the effect of Melissa suffering on the fourth quarter and the high inventory levels that you mentioned before. How is that going? Since it's -- since this 2 months of this year? Is there anything different happening right now? Is it different? Or is it normal?

[Alceu de Albuquerque, executive]

The Division 1 -- it is still operating the same. I can see Wagner about it. Division 1, we have observing a growth. The sell-out is better than Melissa, and sell-in also. We can observe the sell-in growth from Division 1 in this 2 months of this year. And Melissa has a little bit more challenging sell-out, is a decrease in sell-out and sell-in.

[Wagner Salaverry, analyst]

Reductions in personnel, what's going to be the impact? Is it going to be neutral in the first quarter and the manufacturing adaptation to that? When is it going to happen during the first quarter? The reduction costs -- are they going to be neutralized with this reduction -- with this decrease? Or is it going to cause higher impact?

[Alceu de Albuquerque, executive]

This adjustment we did that throughout the fourth quarter, but throughout the first quarter is when we are going to be able to see the positive scenario resulting from that. We are not going to have any layoffs from -- in this first quarter, maybe -- but the most of the layoffs happened on the fourth quarter.

[Operator]

So let's go to our next question from Eduardo [indiscernible]. Eduardo's question, what are the main challenges for 2023? And what are the main relevant investments for the year and what can we expect from the results of the first quarter?

[Alceu de Albuquerque, executive]

What are the main challenges, political and economic scenario? We can see some sort of uncertainty from our clients, retailers, distributors and that impacts the selling volume. They are not increasing their inventories. It's not happening in a fast way. We can see the growth in selling in the Division 1 brands, especially in the magazine channel and in the retail channel, store channel, retail channel. What are the 2 other -- the main investments, I can say that we are complementing investments in the expanding at the Crato factory to increase production capacity EVA. We also have investments in modernization and equipment for optimization in the manufacturing processes. And apart from that, nothing exceptional -- nothing that's going to change the trend of reinvest, what has been depreciated -- decreased.

[Operator]

We now close the Question-and-Answer Session. We would like to give the floor to Mr. Alceu Albuquerque to the final considerations.

[Alceu de Albuquerque, executive]

People, thank you so much for your presence here. If you have any other questions, myself and my IR team are available. Please get in contact with us.

[Operator]

The video conference related to the fourth quarter of 2022 of Grendene S.A. is now -- has now ended. The Investor Relations department is available to answer any other questions. Thank you for all the participants, and have an excellent day.