M Dias Branco SA Industria e Comercio de Alimentos
BOVESPA:MDIA3
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M Dias Branco SA Industria e Comercio de Alimentos
Earnings Call Analysis
Q3-2023 Analysis
M Dias Branco SA Industria e Comercio de Alimentos
M. Dias Branco had an exceptional quarter, characterized by a 33% year-over-year growth in EBITDA, signaling the company's ability to maintain high profitability and manage expenses effectively. Record cash generation of almost BRL 1 billion, resulting from prudent working capital adjustments, underscores the firm's financial discipline. Notably, the leverage ratio improved to a lower 0.3x EBITDA compared to the previous quarter. This financial stability led to a change in the payout policy, raising the dividend payout from BRL 0.05 to BRL 0.06 per share and committing to distribute 80% of profits, up from 60% previously.
Even though the company observed an 8% dip in net revenue compared to the same quarter last year and a 4% decline relative to the second quarter, it was rooted in macroeconomic factors such as high interest rates which affected retail stock levels. Nonetheless, M. Dias Branco displayed a 9.6% growth in net revenue on an accumulated yearly basis. Contributions from significant projects, namely Piraque's merger in 2020 and organizational redesign in 2021, have honed operational efficiencies, as reflected in SG&A costs decreasing from 25% to approximately 20%. Cost reductions, particularly with wheat and palm oil inputs due to falling market prices, and the stabilization of SG&A costs, aided the company in maintaining a record EBITDA and solidifying the gross margin to 35.6%.
M. Dias Branco's market share showcased strength across its core categories, with increases both year-on-year and sequentially in various segments, underscoring its competitive edge. Strategic brand management, focusing on brands with higher added value like Piraque, and the removal of underperforming brands and SKUs optimized the product portfolio. Their ability to integrate new acquisitions more strategically into their portfolio was evident from the 78% growth in net revenue of Piraque since its acquisition. The company's geographical expansion and the introduction of high-value products further support this growth narrative. Revenue trends remained positive regionally, with notable increases in average prices and volumes sold, particularly in the company's attack regions.
M. Dias Branco managed to keep selling and administrative expenses in check, ranging between 20%-21% for both the quarter and the first nine months of the year. This careful balance, coupled with declining costs, resulted in the company reaching a 16% margin within its historical norm and achieving the largest EBITDA in its history at BRL 441 million. This demonstrates the company's adeptness at aligning cost structures with strategic goals and reinforcing its position in the market.
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Good morning. Welcome to the video conference of M. Dias Branco referring to the results of the third quarter of 2023. We have with us today Gustavo Lopes Theodozio, Vice President of Investments and Controllership; and Fábio Cefaly, Director of New Business and Relations with investors. We inform that this event will be recorded. [Operator Instructions]. The transmission is also being made simultaneously on YouTube, at the address www.youtube.[Foreign Language] mdias.
We would like to clarify also that any declarations that may be made during this video conference relatively to the perspective of the business of M. Dias Branco, projections and operational goals and financial goals are beliefs and premises of the directors of the company as well as information based on information currently available. They involve risks and uncertainties and premises for -- as they may refer to future events, which under circumstances, which may or may not occur.
Investors should understand that general economic conditions and other fact -- other operational factors can affect the future performance of M. Dias Branco and bring us to results which are materially different than those expressed in our future considerations.
I would now like to pass the word to Gustavo, who will begin our presentation. Gustavo, please go ahead.
Thank you all. Welcome to another quarter of revelation of profitability, showing coherence in what the company has been saying in our discourse, in our presentations and also consistency with a high level of profitability and this has all maintained the discipline in the management of expenses, level of SG&A, which the company has promised. And in this quarter, we had cash -- record cash generation of almost BRL 1 billion, the fruit of the results of the company, adjusting its working capital for some time, which brought us to a level of leverage even lower than that recorded in the previous quarter of 0.3x EBITDA, generating comfort to the company to change its payout policy, improving a little bit both the payout, the percentage payout that will be distributed as well as the amount of advances -- fixed advances for each quarter.
In this period, we had 33% growth compared to the same period last year. EBITDA in the quarter of -- record EBITDA and the history of M. Dias looking back -- getting back to our historic margins since -- as we mentioned, close to BRL 1 billion in cash, which is a record. And we look at the accumulated, the company improved almost every line, revenue, volume, costs, rate and margins and cash generation. We're going to explain this all going forward. But we also brought us to a great -- higher level of confidence from 60% to 80% of the profit, which we distributed and also the payment of a fixed quarterly payment of BRL 0.06 to BRL 0.08 per -- BRL 0.06 from BRL 0.05 per share.
Also a little more detail about this quarter and we're going to -- further ahead, we'll bring in the Q&A section to talk a little bit more about the results. Thank you again, once again, for your presence. Fabio, please take over.
Thank you, Gustavo. I'm going to continue here with the presentation on the line of what Gustavo was saying of the consistency and coherence, we see in the results an accumulated growth of net revenue of 9.6%. The variable costs stable in the accumulated of the year. SG&A of approximately 20%, which when we analyze the market, it's -- as we've done for a while, based on 2 important projects, which we have been able to deliver productivity and efficiency, which was merger of Piraque in, 2020 and the organizational redesign in 2021. We reduced SG&A from approximately 25% down to closer to 20%, BRL 920 million in the accumulated EBITDA.
Looking at the quarter, we had a reduction of net revenue of 8% compared to the same period last year and 4% in relation to the second quarter due to several market conditions, which I will detail to you going forward. It's important to explain the situation of net revenue. The variable costs continue falling, especially due to the fall of the price of wheat and palm oil, which are the principal inputs used by M. Dias in the production of our flours and cookies and snacks. And SG&A is approximately 20%, record EBITDA of almost BRL 1 billion of cash generation in the period.
Here, as Gustavo mentioned, the question of a payout, we maintained the 5 annual payments, 4 fixed and 1 variable with the fixed payment being -- went from BRL 0.05 per share per quarter to BRL 0.06 per share per quarter. And the payout, which is important to mention a little bit higher -- until 2020, our payout was only 40%. In 2021, we raised it to 60% and -- which was valid for the entire year of 2021 and '22.
And starting now, our new policy will have -- assume a payout of 80%. So we want to -- before getting into the results -- the detailed results in the quarter, I want to open up a parenthesis to bring you a horizon, a little bit longer horizon and also publish our vision of the results -- the most recent results of M. Dias, looking at the evolution of 2021 to 2023.
Starting with the net revenue. The numbers show the exercise of 2021, 2022 and 2023 in the last 12 months to have a reasonable comparison, annualized results. We have growth of net revenue of 21% to 23% from 28%, which has grown from 1.7 million to 1.75 million tonnes, which is a growth of 2.7% in volume. And average price was due to the renewal and launches and acquisitions and price readjustments, the average price went up 35% in this period.
The costs went up greatly, mainly due to the war in Ukraine and Russia, which caused an explosion in the prices of wheat and palm oil. Our CPV in this period was 3.3% to 4.2%, which is an increase of 32%, which impacted unfavorably our margins in that period, especially in 2022. And recently going through the average price, we've been not able to attenuate this increase in costs. Our margins have had a evident evolution -- a gradual evolution, 8.8% was the bottom of this period in 2021, 8.9% in 2022. And in the last 12 months, we have reached an EBITDA of BRL 1.13 billion at about a margin of 10.3%.
Now going back to the results of the quarter. We had the most difficult moment in costs and margins between the fourth quarter '22 and the first quarter of '23. And from -- since then, our margins have been gradually improving. In the third quarter of '23, we delivered 32% EBITDA margin, which is within the historical average of an average of 16.1% since the IPO in 2006 and the year of full year 2020. Remembering our strategy is the strategy of growth with profitability.
Looking at -- when we talk about the current business, which is the core business, which is in the growth in the regions of the South, Southeast of Brazil and defending our position of dominance in the North and Northeast. The other categories within there -- most recent acquisitions are Latinex snacks, most healthy snacks and Jasmine with granolas and gluten-free products as well as healthy biscuits, healthy cookies. And so international and beyond exports, we also made our first acquisition outside of Brazil, which was Las Acacias, which has given us results quite in line with our business plan with an EBITDA margin of 12% to 14%.
So now we're going to start the first chapter of the presentation of the quarterly results, which is revenue and market share. Here, we would like to, first of all, share with you our vision of the context of the market. And I think here and the first message is in relation to demand and when we talk about demand we're talking about the sellout or the sale from the retailers to the consumers.
Consumers are buying more or whether they're buying more or less. And starting from the market numbers and the Nielsen numbers, I'm looking here at the table on the left-hand side, which is for cookies. In terms of value year-on-year, the market grew 9% for cookies. And in terms of volume, it went down by 1%, which is basically stable. The market for pastas on the right-hand side, in terms of value has similar performance with the cookie, cracker market growing by 9% in volume. It grew by 1% and number of units sold grew by 4%.
When we look at these numbers, our conclusion from the standpoint of demand is that the demand is strong, firm. The volumes are pretty stable year-on-year. And in value, the markets grew by almost double digits. The short-term vision from the third -- second quarter to the third quarter is similar in both markets in cookies and crackers through growth in value, volume and units sold and in pastas it's the same thing. The market and volumes sold went up by 2% and in units sold by 4%. So we don't see any unfavorable situation in relation to demand.
On the other hand, the sell-in, the sales from the manufacturers to the retailers was unfavorably impacted. Principally in the third quarter, we observed that with some clients, something that was widely noticed, broadcast in the media and here are few examples of those articles that retailers reduced their stocks due to very high financial costs, higher interest rates and those had an impact -- unfavorable impact on our revenue, which is our sell-in, which is the revenue of M. Dias with retailers -- from retailers.
Looking at this situation for the numbers of M. Dias we bring our stock -- our retail stock measured under Neogrid for the 2 principal categories, which are cookies and crackers and pastas and we observed that last year, we had 42 days of stock in retailers in the cookie and crackers area. It went up a little bit in the second quarter but year-on-year, it had a heavy fall off of -- from 42 to 34 days, which is together with the macro vision of the market. In pasta it's the same reality, 44 days at last year and 39 days this year. So no problem with demand. Retailing is buying less from the manufacturers and this impacted our sales, which is the revenue of M. Dias together with the retailers.
Looking at our market share in the 3 principal categories; cookies, wheat flour and pasta. On the top line, which is always the market share value. And in the bottom line is market share of volume. For cookies and crackers, we gained share year-on-year in value, year after year on volume, a small falloff in value and volume quarter-on-quarter. But this is within the margin of error. Wheat flour, we gained in all of the comparisons year-on-year and in volume year-on-year and also sequentially in volume and value.
In pasta, we closed the third quarter with our market share lower than last year's, which is -- which goes together with 2 situations. We did -- as we mentioned in the beginning of the quarter last year, a reduction in the size of our packaging for an important part of our portfolio of pastas, which caused a fall off, at least temporary falloff in market share for the second to the third quarter. But now from the second, third to the third quarter, we observed a stability.
In terms of growth of value, we grew [indiscernible] market share a bit in terms of [indiscernible] 0.2%, but this represents basically stability.
Now looking at the numbers of revenue, the revenue numbers, which wind up being explained by the fact -- the previous factors that we mentioned. Looking at the third quarter of the '22 compared to '23, there was a falloff in net revenue. Volumes fell by 6.6% and the average price by 1.6%. The drop in average prices is connected with our lowest value products such as wheat flour and margarines and fats, whose prices have accompanied the price of commodities. And so for the recent quarters, the price of wheat went down, palm oil went down. And so the market, in fact, our portfolio -- the average price has been contracted together with the price of these commodities.
Cookies and crackers prices have gone up year-on-year. And in this quarter, we've had a falloff in volume above 10%, which was principally due to the situation with retailers. Between the falloff in prices, biscuits and cookies, they've had an increase in revenue -- fall-off revenue comparing with the sequential comparison, net revenue falls 4%. Volumes are practically stable and average price 3.2%. And so in terms of average price, it's similar. With the year-on-year comparison, the principal fall in price happened again in the lowest value-added categories such as wheat flour and margarines and fats. And the others were able to increase their volumes. So we gained market share sequentially but still 3.2% below the previous quarter.
And in cookies and crackers, prices are almost stable, pasta is down a little bit and volumes between 2% and 3% in cookies and crackers. In the accumulated for the year, we grew in all 3 variables. Net revenue grew by almost 10%, with sales volume, which grew and also an average price increase. Cookies and crackers, we had average prices above 10%. This has to do with mix, with launches, the acquisition of Jasmine, especially in cookies and crackers and a little bit of pass-through, especially from the end of last year and beginning of this year.
The result of revenue, region by region, looking at the accumulated for the year, which wants to grow more in the attack area. And this has gone up with increase in average prices and growth in volumes. In the defense area, we also had growth in the same period, grew by 8% and with more 6% of average prices and 2% in volumes. And in both regions, we see a falloff in revenue for the same reasons that we explained previously. In terms of inauguration, we started with the focus of adding to our portfolio items with higher added value.
In this quarter, we're bringing, for example, from Jasmine an item of corn cookies, which has growth of BRL 31.7. Snacks, 2 examples here, tapioca cookies, with an average price of BRL 60.7, Looking at M. Dias as a whole. And now looking at the Piraque brand, which has had a recurring demand of the market for a while, that we would make an overview of the results of Piraque since the acquisition, remembering that the acquisition happened in 2018. We brought here the principal numbers from that brand.
These are consolidated numbers, which bring all of the categories of the Piraque brand of cookies, snacks and pastas comparing with what happened with the revenue between 2017, 1 year prior to the acquisition, when M. Dias was not in Piraque and in 2023, the last 12 months, net revenue of Piraque grew by 78% in this time. It is a brand with net revenue above BRL 1 billion. The attack area, which for Piraque tends to be a defense area, it's very big in Rio and also in the Southeast. But following the rationale of M. Dias as a whole, in the South, Southeast and Central West, Piraque went from BRL 170 million to BRL 1 billion. So it's still BRL 1 billion brand in our attack area, which is a growth of 58%.
And in the North, Northeast, which is our defense area, we multiplied by 10. Piraque is spread -- which spread but it didn't exist in these 2 regions. And today, it has net sales of BRL 153 million, which is basically the connection of a very strong brand with a good distribution system, which is the M. Dias distribution system in the North and Northeast.
In terms of margin, we look at a perspective of gross margin. Piraque continues with gross margin structurally above that of M. Dias by 5 percentage points, very aligned with the pre-acquisition period since it's a brand of higher added value and higher growth. The results in the short term for Piraque is also very positive. There was growth quarter -- year-on-year third quarter '23 compared to 3Q '22 in form of sales, in net revenue. And the gross margin of Piraque for the third quarter was 39.6%. In the accumulated for the year, it's also very similar. There was growth in the principal variables. It's a brand which today represents 13% of our net revenue. The second biggest brand of M. Dias, the biggest being Vitarella and the second is Piraque and it was elected by consumers through a research by Kantar as the second brand, most chosen by -- for consumption outside of the house, outside of the home. So we have this category of snacks, such as these, which you see here on the screen as an example.
Going now to the revenue and market share for costs and expenses, both in wheat as well as in palm oil, we saw a falloff in prices during recent months, remembering that the red line shows the prices in the market and the blue line shows the price in the M. Dias stock. So starting with wheat in the last 4 months, we have a price below the reference price in the market. And in the last 3 months, the price of wheat below $300. And at the end of the line, $274 a tonne, which is a price, which is below the pre-war period.
Palm oil is a situation which is similar to wheat. It has been falling in recent months. We had, between stock and hedge positions together with a longer view. But in the final month of the quarter, our price -- our stock of our products -- our stock has gotten almost to the same price as the price in the market. So this is the fall of both in wheat as well as in palm oil were factors which were very favorable for our recovering of our margins.
If we look at this next graph at the gross margins, the most difficult moment, which was in the 1T'23 and third quarter were between 23% and 26% and now they improved in the third quarter. And now we're up to 35.6% in gross margin. Fixed costs measured by the price, real per kilo was stable between BRL 1 and BRL 1.1 and the variable costs continue to fall off, going down to as low as BRL 3.2 per kilo.
The administrative and sales selling costs, selling and administrative expenses stayed between 20%, 21%, both in the quarter as well as in the 9 months of the year. And this combination of costs falling and stable SG&A helped us to get back to a margin of 16% within the historical level and a record EBITDA of BRL 441 million, which is the biggest in the history of M. Dias. The net revenue, the evolution of net revenue, the company year-on-year has grown by 33% with a net margin of 9.6% -- 9.5%, going back to the historical levels of M. Dias.
Now looking at the generation of cash and investments. We also had a generation -- operational generation, a record of BRL 973 million, the highest in the history of M. Dias for 1 quarter. This cash generation came from 2 sources, both improvement in results with an EBITDA of [ BRL 340 million ] and deliberation of working capital. While last year, we consumed cash, this year, we have generated cash in accumulated the vision is almost the same. Looking at the detail of the working capital, we had a positive evolution in the 3 principal lines for working capital. There was an improvement in the number of days for suppliers from 44 to 56 days. We had a reduction from clients from 58 to 55 days for clients and a reduction also in our stocks.
Here, it's important to mention in a little bit more detail, suppliers is where we have been very diligent in the management of that area. The project of medium to long term, which started in 2020 when we -- on an average period was inferior, the team of suppliers and production, financial area, everyone, we have a team that is quite, a wide-ranging team set up to improve our numbers, for the number of days we get from suppliers, which has -- which is gradually and consistently has freed up working capital in our results.
Looking at the scenario of results and the generation of cash, the leverage -- the level of leverage was 1.2 to 0.3x EBITDA in the third quarter of this year. And Fitch also reaffirmed our rating, which was the best possible rating of that agency, AAA stable outlook for the sixth consecutive year. 70% of our debt is long term. So we went from a gross debt of BRL 2.163 billion, only 30% comes due between -- before September '24 and the rest, which is another BRL 1 billion which will come due after 2026, starting in 2026.
In terms of CapEx, we invested BRL 223 million over the year, with a CapEx on maintenance, several initiatives in the factories and in systems for all the process of digital transformation, which M. Dias Brancos is currently undergoing.
To close our presentation, looking at ESG, the more detailed information and explanations are all in our earnings release and are always organized in 3 basic pillars of our strategy of sustainability, which is caring for the planet, believing in people and strengthening our alliances.
Some of the principal initiatives in ESG over the third quarter, in fact, including the revision of our strategic plan, which happened here, with the work that was done by the statutory directors and the Executive Committee and with the support of an outside consultant.
And with that, we close this part of our presentation and we can pass over to questions and answers.
[Operator Instructions]. Our first question comes from Gustavo Troyano of Itaú BBA.
Two points I wanted to ask about here. And first, in relation to the trade-off of margin for end market share, which we always discuss, something that causes our attention on this -- the market share volume, both in cookies as well as in pasta, where the value went up. I want to say it's reasonable for us to assume that the industry is perhaps being a little bit more aggressive in prices. And if you're performing better in value than in volume and try to understand if there's any category within pastas or cookies and crackers, which could push further this aggressive in terms of price than what we have been seeing. If this is a reading that makes sense to you?
And the second question is in relation to costs. Here, I wanted to look a little bit more -- focused a little bit on sourcing for wheat -- Russian wheat, want to confirm with you the amount of the discount that you're able to get on this wheat compared to market wheat and also understand how much of this wheat is already going through the results in the third quarter. And if we can inspect any more marginal improvement in your curve looking at the market for the fourth quarter, looking with the -- with this Russian wheat coming through your results?
If I can start here and then you can add. Please go ahead, Gustavo.
Going into the question of market share, let me start with the discussion of margin versus market share. We have been saying this, the company since this time, a most challenging moment of the company and more recently, the war, we have seen the Brazilian market has an important role to direct the markets. And our option was to put the company, trying to put the market in the direction of recovery of historical margins. With this increase of commodity prices and the difficulty that consumers are having in paying the price of this recomposition of costs, was not something that was easy. However, somebody had to do it. And so we did this. This affected temporarily the company's volumes, which I think, are stable. If you look at '21 or '22 and '23, where the company is between, 1,700,000 tonnes, this year will be a little bit more than that. We have production capacity.
We have cash to advance into new markets and to recover market share. We've done this year-on-year. Our market share has been lower and now it's growing. And so it's now started to drop off a bit but in our vision, this is not a problem. Why is this happening? To answer your question -- part of your question -- if some -- if we're being more aggressive, yes, we've seen some competitors being more aggressive than us, you can say what category, basically, in common pasta in the Northeast, we have this well mapped out. It's a fight and why do they gain market share with this leverage? It's price. Certainly what's happening there was gaining market share of the company that are practicing lower prices. So we've accompanied this closely. We don't see any difficulty to do that to recover this market share. The problem is -- the point is that the company is doing it in a way surgically and carefully so that we don't lose our margins and go back to the margins of the pandemic era, below 2 digits. So we've done this with a great deal of care. But some of that has already happened in the past and we know how to manage well this trade-off between market and margin. So you can see perhaps at the end of this next quarter an improvement in market share.
The second point, something that we cannot say here, Gustavo is, as a percentage, how much wheat has become cheaper or more expensive. This is information, which is very confidential and strategic for the purchase of wheat. The percentage of wheat overall within our total stocks has gone up -- has increased due to several opportunities, which showed up in this year and last year. We didn't buy anything prior to -- through the pandemic and we started to buy now. We have more than 20% of stock, Russian stock, as well as the stock of -- Brazilian stock, which has increased due to our increased production.
Prior to the pandemic, we produced 6,000,500 tonnes. The Brazil now needs at least 12 million tonnes. It went up close to 10 million. Everybody had an expectation of 11 million tonnes of wheat from Rio Grande do Sul this year, from the Central West growing -- but with the rains in Parana and Rio Grande do Sul, we had a reduction in this provision. Now we're looking at a smaller harvest but even so it will be higher than it has been prior to the pandemic. So we have increased our stock of Brazilian wheat as well as Russian wheat.
Finally the company has -- we're close to 20% right now. So we have an opportunity. We've been seeking to take advantage of the opportunities both in the market -- Russian market as well as in the Brazilian market as well. Here in the states, which I am -- in the regions which I mentioned.
Fabio, did you have anything you wanted to add?
I think that's complete, Gustavo. Go ahead.
The next question [indiscernible].
I wanted to see if you could give me a little follow-up in relation to the previous questions. At another moment, we were discussing the situation of the sell-out when reducing stocks and you've been trying to negotiate that due to an increased volume. And perhaps we haven't presented these numbers. I wanted to know how the strategy is going? Has it worked. Has had a positive impact in the quarter? And beyond that, if you could help see this, fourth quarter might be a little more sensitive. And so if we look at the utilization of capacity, there was an expressive falloff in this semester as happens in the area of the quarter, the expectation from the fourth quarter will decelerate in relation to the fourth quarter -- in the fourth quarter, this will be the first point.
The second point is also, if you could speak quickly about -- we understand that you're getting below the market, which is very positive. But when you -- in palm oil, you're not acquiring -- what the effects of the market? What do you see for that? And the question of the arbitrage versus soybean oil, how much soybean are you using? If you're thinking about consolidating vegetable oil instead of palm oil, if this would lower your cost in the view of the market or not. And if you can please comment on that and relating to stocks but also thinking in terms of price and volume, the price of commodities, you're also lowering your stocks and at a lower cost I mean that is -- that what's making the most difference in this variable. So the 2 principal points, volume and raw materials.
Gustavo, do you want to start?
Yes I can start. Thank you, [ Leo ] for your question. In fact, the actions that we commented, first of all, the correct -- you're correct -- your reading is correct. We see sellout continues to going very well. No serious increase in terms of market volume but it continues to be flat. There's no retraction on part of the final consumer, which is the most important part of the chain. What we have seen is a lowering of the volume of the sell-in due to the strategy of several large companies who have decided to lower their costs, lower their inventories due to the high -- very high financing costs in Brazil.
We've been trying to help some of these clients -- some of our clients. This effect should happen in the fourth quarter, creating plans together with the clients, there was a timing to do that. So the results should appear in the fourth quarter. The lowering of capacity, in general, the fourth quarter is a quarter more challenging than the third quarter because if you start to compete with the Christmas items and the parties period and so, it hits us a little bit more on volume. This year, we had important actions within our fourth quarter, which will be better than other quarters in the past. However I still don't believe that it will be the best quarter than the third quarter.
Soybean oil today, we use approximately 20% in our composition, our palm oil. If we look at it, it's -- the price in line with the market. At some moments, it was below market. Soybean oil today has another role, which is very important because we started this requirement to place stamps to place seals on the packaging of saturated fat, sodium, sugar, et cetera. And the soybean oil helps to generate some seals in terms of saturated fats. So we use it not only for cost, will also diminish a little bit of those -- number of the seals, which have started to become obligatory in the Brazilian market but still somewhere around 20%. Did I forget anything, help me, I didn't answer any of your questions.
I think that's full, Gustavo, just to connect the question with Leonardo and Gustavo. Due to the stocks that we have today, the inventory that we have of palm oil and wheat, we have the possibility of having a sequential fall in the cost of these 2 commodities, which will then flow into our results between the third and fourth quarter.
The next question is from Lucas Ferreira from JPMorgan.
This is about the price of cookies and crackers. The average price of the company was stable during the quarter. But I wanted to know if there was -- if this was over the quarter or the half. When we look at the industry prices have started to fall on average, looking separately all of the categories, the more premium brands, the price really won't drop but we do see a fall of prices in the larger quantities of SKUs that we had in the past. I wanted to understand that this makes sense in the purpose -- in the headlines that you placed on the -- by the inventories in retailers that the retailers also want to stock up at better prices. So if you see whether this is more spread over different regions and SKUs.
And if this is a tendency which could result in a lower prices in cookies in the fourth quarter? And my other question is about costs. You mentioned that today palm oil and wheat still have a positive influence for falling further in the next quarter. Have we also produced a lot less in the quarter? So if you understand this to be a normalization of volumes going forward or if this is dilution of fixed cost, if it's going to have a positive effect on the fourth quarter results?
And finally, the allocation of capital, you've approved an increase in the payout, which is in the range of the new dividend policy, however, in this context, would it make sense to repurchase your shares rather than increase your payout?
Go ahead, Fabio and I'll take the last one about the payout.
Okay. Lucas, starting with your first question in relation to the cost. The prices of cookies, what we see in the field, in the market. IPCA of cookies and crackers based on Nielsen's results, the fall in prices, our biscuits and cookies and crackers is very low. We saw it in the IPCA, it was approximately 1% in the index that it fell over the last 12 months. The numbers from Nielsen followed the same line and that's what we've seen also in the market, a very small falloff in prices, which is concentrated principally in the subcategories of cookies and crackers with lower value added, that have a bigger exposure to the commodity prices, such as cracker, Maria crackers and Maizena crackers. In the other categories that have a higher added value, we haven't seen reductions in prices. And so there is a reduction but it's a very small reduction. And the fall in costs, in terms of results oversees this -- takes over this small fall in price and costs, definitely in the wheat market, we're talking about looking at another category of [indiscernible] and wheat flour is a commodity and its price follows the wheat prices.
The cookies and crackers have other ingredients beyond the question of the branding. It's a category where the consumer pays more attention to the brands, which is growing in revenue and in volume. The cookies have other ingredients beyond the wheat, there is palm oil, chocolate, Maizena, the packaging, which has a more elaborate packaging than a wheat flour packaging and design. So it's been a -- there is not a direct correlation of cookie prices with commodities prices.
And so your second question is in relation to a possible upside of dilution of costs in the next quarter. Yes, that is a possibility. This will have to do with what Gustavo mentioned earlier, these negotiations which we've done with retailers to try our balance our cash to recompose market share and volumes. This strategy, if it works, naturally, we will increase the volume of production and have a bigger dilution of fixed costs, which could contribute positively to the results in the quarter. So it's important to point out then looking not just at the quarter but also looking forward and the budget which we've been discussing with the Board of Directors, to have this, an authorization depending on capacity. If we should see a volume with the reduction of fixed costs. This is in our mind.
As I mentioned earlier, there's a reserve capacity, which is important, unused capacity which we could use at any time. And this is our intention to utilize that. So looking at our capital structure, our idea has not been an objective of discussion. We are -- in spite of the movement in the area being very good in [ DPV], we think that this should include -- should improve rather than worsen. We're talking about 20% free float. We think that at some point in time, that might improve. So we have the opposite vision, liberate this free float in the hope that this will allow the stock to become more attractive in that sense and not to do the opposite direction. We should use this cash on hand and this capital looking at new opportunities. This year was a year of doing our homework.
We did 3 acquisitions. 1 outside of Brazil, which even though they are small acquisitions, they have a certain amount of complexity to integrate. Just to give you an idea, we put together this year the 2 factories of Latinex in Parana and there's Jasmine factory in Parana and all of the [indiscernible] allocated from, the rental part from Latinex to near [indiscernible] production lines of Jasmine [indiscernible] companies in the same industrial park and Jasmine incorporated Latinex due to the complexity -- operational complexity. These are easy to say but in practice and the execution that generated a great deal of complexity. So passing this phase and scaling up the volumes of these companies, which were acquired, which are doing very well.
We're going to grow in cookies and crackers this year. We gained market share in Uruguay since the beginning of the year. So things are going well. however, next year is a year in which we have more time to look at the opportunities for M&A in the Brazilian market. At some point in time, this -- the market will line up but there will not be a stock buyback.
The next question is from Thiago Duarte from BTG Pactual.
I wanted to touch on 3 points if there's time. The first, I wanted to talk about the discussion of volumes and these different volumes that you brought in terms of inventories at the retail level and the difference between sell-in and sell-out, with the numbers that you're bringing, these are numbers that are -- what I see numbers for the stock of M. Dias products in stock, in retailer stock. I wanted to understand if this was a practice, this reduction in
levels that has been a practice more focused on the [indiscernible] portfolio. They already understand that this has been happening with the entire industry, that retailers will start working with lower stocks. And I wanted to hear from you as far as the implication that this has going forward. We can imagine both that the retailers will rebuild these stocks, we should see in the fourth quarter or next year, an improvement in the sell- in relation to sell-out. I wanted to see if this is a hypothesis because you guys are working.
So if you understand that this is the new normal and that when we look at the -- for the next year, looking forward for next year, we should imagine a worsening performance of sellout versus sell-in year-on-year. I wanted to understand how you understand this difference of stock going forward? Second question is, as far as the working capital, which you pointed out very well in your presentation, the improvement on the 3 lines. However, this improvement is being caused greatly by the line of suppliers. When we look at the composition of the cost of the company, a relevant part of that in the commodities area.
I wanted to understand what is the nature of this improvement of periods of terms from your suppliers. And the hypothesis that I was thinking about that it might be associated with a little bit of the hedge that you have done here, the financial hedge that you have made lengthening the period for the suppliers and getting a counterpart for them. We want to understand how far you can go in terms of improving these terms with your suppliers above this exceptional level that you've arrived at in this quarter?
And the third question, I wanted to hear a little bit about your understanding of the portfolio of brands. We see in the past M. Dias Day in 2018 that you had started to segregate after the acquisition of Piraque you started to segregate the priority of the brands with Piraque perhaps as a national brand. You had several other local brands, Adria and Vitarella. And you even mentioned in recent quarters about the cleanup of this portfolio with several brands that are less important. And when you see where we are and where do you think you go in terms of your portfolio of brands, should it be a leaner portfolio, more focused on certain brands, which you have done for instance you pointed a lot about Piraque and its recent performance in recent years or not. If we should understand an extension of your portfolio at some point in the future. These are my 3 questions.
Fabio, I'm going to start here and then you add on please. Going to the first point. The sell-in is more M. Dias but sell out is the -- the sell-in is an M. Dias data and the sellout is market data. Looking forward, we think there's a trade-off between reduction of stock, which is natural in retailing. When you have a smaller stock, you're more exposed to lose sales. If you don't -- instead of chocolate, strawberry and vanilla, you only have chocolate and strawberry. So when you have 1 less brand, the consumer doesn't find it. So they just don't buy it. However, this, we've seen many times and we worked greatly with the cell phones and photos helping our people to see the trade-off that these policies cannot be used to generate in general for all suppliers and for all visitors. We have SKUs that sell more and others that sell less.
There are brands that sell more and some that sell less. So this reduction in stocks and inventories, understand that at some point in time, it will generate a problem in the stores. It's very probable that they've already seen, they have corrected over time. So the trade-off here, a very important trade-off here due to the data of this information in our vision at some point in time, it's going to recompose the stocks with a improvement in the interest rates and the financial costs, which we've seen and they should operate with stocks with better stocks, that's ours [indiscernible].
In our case, the company understands that it's not the new normal. This is not the new normal. We're going to go back to what it was earlier. This is very difficult to say. However, that there will be a recomposition of the stocks due to the risk of stock-outs on the shelf. This is not the new normal. We also have a plan, an exposure plan, which is very important taking more time in going into new categories and internationalization as we did this year. The focus, however, '23, as Fabio mentioned, in the presentation, expanding in the Brazilian market. So beyond the recomposition of the stock to this trade, we also have this growth for [indiscernible] organic growth engines.
Looking forward, we should have an improvement in volume since we -- more than you've seen over the last 2 years. We understand that at some point in time, at a very specific moment and we said this a lot, working capital is basically a negotiation one-to-one with the suppliers, what they were willing to do for us and what other competitors would practice with us in terms of brand management, category management. And there is supply and for each area -- for each commodity, for each area, each packaging type, there's a big group of people looking at not just at the new developments new suppliers but also the renegotiation of things that we think are important. We've used an instrument which is in partnership with several Brazilian banks of the forfeit, which is crazy, which took over the market, where we lower our periods, our terms but we offer financing through banks for the supplier to have at a lower cost than he would have if he was borrowing directly from these institutions, it's been 1 of the levers of renegotiation.
However, there was a lot of exchange in suppliers as well. We changed a lot of suppliers due to these negotiations, substitution of material as well. Thanks to a little bit of that. Going into the brands, this was a year that in the 3 brands that you mentioned, we continue with the optimization of our portfolio, both the SKUs as well as brands. We have several brands which continue operating. But generally, the brands -- the low-priced brands of M. Dias but with no investment because we continue having this correlation with the consumer in that specific region.
And that -- for that reason, it continues but with no investments but the investments continue being destined to especially for the Adria and Piraque brands. If you look at Adria, the most recent advertising, it's much more directed to a higher -- the highest -- the most premium brand of the company, which is the hard grains [indiscernible] and looking at Adria we should see an investment -- a higher investment than we had this year, which was very low in these new brands, especially Jasmine, which is a brand leader in the sector of healthy snacks and completely integrated with the distribution network of M. Dias. And shortly it should have a huge capacity for expansion and this will have to be supported by investments in marketing. So that's about the answer for that.
Next question comes from Isabella Simonato from Bank of America.
I wanted to go back a little to the allocation of capital, discussion of the allocation of capital. You mentioned a few interesting points. I think the question of M&A. There are several factors. The sector as a whole, when I looked at it has fallen suffered a falloff in valuations, they suffered quite a bit. But when we look at the deals in this sector, they're still coming out with multiples that are quite high. So I'd like to understand a little bit what's your vision when you look at a strategy of growth beyond the question of the category and the value added, looking a little bit at this trade-off between your stock price, between an M&A, which has a multiple that's higher and the capacity to return -- to give a return to your stockholders not on the repurchase, not only through repurchases but also with cash generation. So I wanted to hear from you a little bit how you guys are looking at this strategy in this new world of valuations and high capital costs.
Actually, we've seen multiples that are quite high this year. I'm not sure if it's something that will continue or not. We still have the capacity to do a big M&A in some regions. And there are regions where the company does not have a good coverage, an ideal coverage. We have the region where we were born in the Northeast, North and Northeast, but we've always had experiences in buying companies with multiples that we would say, a little bit higher than the market. But with the synergies and expansion this multiple at the end of the day, looking internally reduced very greatly such as the case of Piraque. When you look at the data that Fabio said, in the history of this acquisition and plugging it into the company and what this company has become where we not only -- the states close to Sao Paulo in the Southeast but you can see the difference in what was Piraque in 2018 and what it is now.
The same thing is true if you look at the Northeast, it's a brutal difference in the exposure and presence of Piraque here in the North, Northeast. So it's a market, so the market is sovereign and we hope that it'll always pay lowest -- the lowest possible margins. However, the company cannot let go of good opportunities. High multiples, opportunities which aren't that great, we're not going to do, we're not going to look -- we're going to look at our multiples, for good opportunities. And with this capacity of synergies with M. Dias we'll be looking at those carefully within the Brazilian market. So that's a little bit, our vision. As far as the rest, due to the generation of cash and with the leveraging of the company very low, we're looking at the payout structure, which is something that -- by the way which has been -- being asked of the company for some time. And we are now evolving over this question year-on-year. It went from [ 40 to 60 ]. And we -- the [indiscernible] are fixed. We increased the fixed advances every quarter. Well, that's gone up to [ 80 ]. It's a journey, we have to remember that the company made a distribution of BRL 600 million of extraordinary payouts. And I think it's evolved greatly as a company in this sense, trying to attend the demand of our minority investors. So this is the route we're taking and a little bit of our vision.
The next question comes from Lucas Ferreira of JPMorgan.
Just a specific question about the fall off in prices of margin, if that's something specific for the market or if that's due to the dropping -- drop of prices in oil global prices and which has caused this reduction in prices.
Lucas, yes, there was a price adjustment. Principally, we operate within margin, we must have 3 brands basically in the North and Northeast, not so much, not an important product in the South, Southeast, and sort of West. Here in the North, Northeast. We have...
[ Technical Difficulty]. Hello. Sorry, we've lost our sound here. Hello.
...price is down. A major player in the Northeast, better than what we've seen. But we have recomposed these prices, is more focused on the buckets -- margin buckets, the restaurant style, foodservice style packaging. [indiscernible] not sure what you saw? I didn't see. Yes, there was -- some of the audio dropped out. We missed half of the question, half of the answer. But the competitive question and focus on food service, the mix. What I'm saying here is that the prices went down slightly due to the commodity prices but it's also very concentrated in the margins what we call bucket size, above 5-kilo packages, which are food service packages. I also wanted to mention -- because if you want to repeat the question due to my sound, we saw a fall of average prices in the foodservice sector definitely from the retailers, which are the smaller packages.
Thank you all very much. The question-and-answer session is now closed. We'd like to pass this over to Gustavo for his final comments.
Thank you for your presence. We'll continue at your disposal. Once again, the name of the game is consistency, margin expansion, consistent margin expansion, coherence with our costs, not doing anything crazy. We're operating in a market very surgically in each region. And we're going to continue following in this direction. The question of volumes and margins, cash generation. This has been our mantra and saying that's very, very important for SG&A. Maintaining the relation of net -- with a great deal of discipline and this is the result of these levers, which we continue -- and we'll be continuing in this direction. Thank you all for your presentation and we continue at your disposal.
The video conference of M. Dias Branco is now closed. Thank you all and we thank you for your participation and please have a great day.
[Statements in English on this transcript were spoken by an interpreter present on the live call]