Marfrig Global Foods SA

BOVESPA:MRFG3

Earnings Call Analysis

Marfrig Q3 Results: Revenue Up, Mixed Margins, BRF Stake Increases

In Q3 2023, Marfrig achieved a consolidated net revenue of BRL 35.6 billion, with a strong operating cash flow of BRL 5.2 billion and a healthy free cash flow of BRL 1.9 billion. The adjusted EBITDA stood at BRL 2.6 billion with an EBITDA margin of 7.2%. North American operations contributed the most at 46%, while South America and BRF contributed 15% and 39%, respectively. The adjusted EBITDA from these regions was 28%, 23%, and 49% of the total, respectively. The US dollar accounted for 73% of consolidated revenue, emphasizing North American dominance. South America showed margin improvement by 210 basis points, indicating efficiency. Marfrig increased its stake in BRF to 40.1%, signaling capital allocation strategy and sold off 16 slaughter units for BRL 7.5 billion, boosting its financial position. Moreover, the firm reduced leverage, lowering net debt to EBITDA from 4.05x to 3.21x, and bought back and canceled $81 million in bonds.

Strategic Focus on High-Value Products

In a recent period of transition, the company has solidified its operational focus, maintaining its status as the largest global producer of hamburgers. South American operations are sustained through recognized brands Quickfood, Paty, and Vienissima, catering to a growing appetite for high-value products. Demonstrative of this strategic shift, 38% of continued operations' sales can now be attributed to these added-value products in the third quarter of 2023.

Sustainable Development and Supply Chain Transparency

The company has pressed forward with sustainable development, achieving significant progress in the critical area of supply chain traceability. With 100% of direct suppliers now monitored via satellite, the company underscores its commitment to environmental responsibility and sets a precedence of accountability in industry practices.

Financial Health and Revenue Breakdown

For the third quarter of 2023, the company reported a robust consolidated net revenue of BRL 35.7 billion. A noteworthy 76% of this revenue arises from the dollar and other strong currencies, demonstrating a diversely strong financial foundation. Alongside this, adjusted EBITDA stood at BRL 2.6 billion with a solid margin of 7.2%, pointing to a corporate strategy finely tuned towards resilient segments with higher added value and lower volatility.

Leverage and Cash Flow

Strengthening its financial position, the company achieved a net debt reduction of roughly 18% from the previous quarter and reported a positive free cash flow of BRL 1.9 billion. To further shore up its fiscal standing, adjusted leveraging indices were brought to 3.21x in real and 3.23x in USD following the reception of BRL 6 billion from asset sales.

Operational Efficiency in Challenging Market Conditions

Despite challenging market conditions, including a lower offering of cattle and variations in beef cost, the company managed to distinguish its continuing operations with significantly higher margins as opposed to the assets sold, with a near 10% margin disparity. This raised questions about potential structural differences or unique operational efficiencies within the continuing segments.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, and thank you for waiting. Welcome to the Marfrig Global S.A. Foods Conference Call regarding the third quarter of 2023 results. Please be advised that the presentation is being recorded and translated simultaneously into both languages. [Operator Instructions]

We have with us today, Mr. Marcos Molina, Founder and President, our Chairman of the company's Board of Directors; Mr. Tim Klein, CEO of North America Operations; Mr. Rui Mendonca, CEO of South America Operations; Mr. Tang David, Vice President of Finance and Investor Relations; Paulo Pianez, Director of Sustainability and Communication; and finally, the Director of Investor Relations, Mr. Eduardo Puzziello. [Operator Instructions]

Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding Marfrig Global Foods S.A.'s business prospects, projections, operational and financial goals constitute beliefs and assumptions of the company's management as well as information currently available to Marfrig Global Foods S.A. Forward-looking considerations are not guarantees of performance and involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect Marfrig's future results and may lead to results that differ materially from those expressed in such future considerations.

I would now like to turn the floor over to Mr. Eduardo Puzziello, who will begin the presentation. You have the floor, sir.

[Eduardo Puzziello, executive]

Thank you all for participating in Marfrig's conference call. We will begin now this teleconference going through the main highlights of the consolidated results for the third quarter of 2023.

Consolidated net revenue reached BRL 35.6 billion in the quarter. Consolidated adjusted EBITDA was BRL 2.6 billion, and consolidated adjusted EBITDA margin 7.2%. In the period, operating cash flow was positive BRL 5.2 billion, and free cash flow reached BRL 1.9 billion.

Financial leverage measured by net debt by EBITDA in the past 12 months was 3.91x compared to 4.05x in the previous quarter when we adjust leveraging for BRL 6 billion that refer to the sale of assets in South America, leveraging reached 3.21x in Q3 2023.

North American operation accounted for 46% of the consolidated revenue, whereas South America accounted for 15% and BRF, 39%. When we analyze consolidated adjusted EBITDA, the North American operation accounted for 28% of the total. South America, 23%; and BRF's EBITDA 49%.

Dollar remains the main currency of our results representing 73% of consolidated revenue. The North American operation accounts had net revenue of $3.4 billion in the quarter and adjusted EBITDA margin of 4.4%. The South American operation had managerial net revenue of approximately BRL 5.4 billion, an EBITDA margin of 11.6%, 210 basis points above the margin in the same period of 2022.

During this quarter, Marfrig increased its stake at BRF, reached 40.1% at the end of Q3. This movement is part of a project to allocate capital that will be more described during the call.

Besides on August 28th, we announced the sale of 16 slaughter units for bovines and lambs for BRL 7.5 billion, out of which BRL 1.5 billion were paid on the signature of the contract. This topic will be explored later on by Rui.

Finally, as part of our management liability strategy, we announced the buyback and canceling of $81 million in bonds that would mature in 2026, 2029, 2031.

I now turn it over to Tim Klein, the CEO of the North American operations Tim, over to you.

[Timothy Klein, executive]

Thank you, Eduardo. Let's begin on Slide 4, where I will comment on the results for the third quarter. Starting on the left, sales volume was 6.9% higher than the same quarter of last year. It is important to highlight that Q3 was a 14-week period while Q3 of last year was a 13-week period.

Net sales were USD 3.4 billion, up 18.6% versus Q3 of 2022. EBITDA was USD 150 million, 55.7% lower than last year. EBITDA margin was 4.4% versus 11.9% in Q3 of last year. As expected, the margins in our beef plants were much lower versus last year's exceptional results, significantly higher cattle prices, smaller increases in boxed beef prices and lower drop credit values resulted in a decrease in per head gross margins versus Q3 of 2022.

Now I'll move to Slide 5, where I will talk about U.S. market data. Starting on the left, USDA reported Kansas live cattle prices averaged $180.09 per hundredweight, up 29.3%. The USDA comprehensive cutout averaged $305.67 per hundredweight, up 16.9%, while the drop credit declined 2.8% to an average of $13.53 per hundredweight. The cutout ratio was 1.70 versus 1.88 last year.

As we look forward to the fourth quarter of 2023, cattle feeders continue to have leverage as supplies are tight, both cyclically and seasonally. Beef demand has remained strong, particularly for holiday items as buyers seek to secure supplies for Thanksgiving and Christmas. As cattle prices approach record levels, we are encouraged that beef demand has remained strong at much higher cutout prices. We expect this to continue as we move through this part of the cycle which should allow the industry to operate at margin levels that are stronger than they were during this segment of the previous cycle.

Now I'll pass to Rui.

[Rui Mendonca, executive]

Thank you, Tim. We'll move on now to Slide #6, where I'll explain the South American operations for the third quarter of 2023. On the graph on the left, we see that the total volume for sales has reached 377,000 tonnes in this quarter, basically stable when compared to the same period in 2022. On the graph in the middle, the net revenue for the quarter reached BRL 5.4 billion, 27% below revenue for 2022. That was impacted mainly due to the decrease in the average prices of exports.

As part of our commercial planning, alongside with our pricing system and associated to our sales channels, we put focus of sales in the domestic market, which has reached 50% of the operations revenue in the third quarter of 2023 against 35% in the same quarter of 2022. Graph on the right, we see that the EBITDA margin reached 11.6% this quarter against 9.5% on the third quarter of 2022, which means an expansion, a growth of 210 basis points that is explained mainly due to the reduction in the average price of cattle in that period that more than offset the reduction of average prices in exports.

I want to still highlight that the greater share of added value products and boxed beef products in the consolidated net revenue for the operation associated to the greater diversification in international markets and also to the continuous operating efficiency program have contributed so that South American operations represent healthy margins. In absolute figures, the EBITDA reached BRL 626 million, 12% lower to 2022 EBITDA due to the decrease in sales, as I just mentioned.

Moving over to Slide #7. I'll talk about performance of exports in the third quarter of 2023. The graphs that were presented regarding the evolution of exports, you see that China and Hong Kong are still the main destinations for exports. And they represent 50% of the international sales for the South American operations during the period. It's important to highlight that even with the Asian region remaining as the largest importer of beef of the company, Marfrig has been utilizing its sales channels in the external market, working in a focused way in added value products and dedicating itself to increasing the capacities of its production units for other markets with a goal of always capturing the best trade opportunities.

Moving on to Slide #8. We will go deeper into the sales of assets in South America. As everyone knows, on August 28th, we announced to the market the sale of part of our South America assets in a movement of reorganization and optimization of our portfolio. That transaction is completely in line to the strategy of focus in production of branded beef and added value products through operations in industrial complexes.

As you can see the map on the right side of the slide, we will remain with the following assets. In Brazil, besides the 3 distribution centers, Marfrig will continue with the Pampeano industrialization complex, the slaughter and processing centers with added value and branded products in Várzea Grande and Promissão and the hamburger unit for Bataguassu.

In Argentina, Marfrig moves forward with its Industrial complex in San Jorge as well as the Campo del Tesoro unit, supplier for the main change of global fast foods as well as the Baradero and Arroyo Seco units highlighting branded -- brands Quickfood, Paty and Vienissima!. In Uruguay, the company will move forward with the industrial complex of Tacuarembó, a leader in organic beef production with processed beef units of Fray Bentos and feeder in Rio Negro. In Chile, Marfrig will continue with its storage complexes, distribution and trading. We're in better understanding of operations that I've just mentioned. We show here on this slide in the lower left side, operational performance of remaining assets for the third quarter of 2023.

Moving on now to Slide #9. I will conclude my participation, my share, presenting some strategic details of remaining assets. As seen in the upper part of the slide, after the conclusion of the transaction, our operation will continue to be the largest worldwide producer of hamburgers and in the South American operation, we'll continue producing in natura beef in our industrial complexes through the brands that you can see in the inferior part of the slide, lower part of the slide.

In conclusion, I'd like to highlight that if we take into account sales of added value products on the sales of continued operations, that share has reached 38% in the third quarter of 2023.

With that, I conclude the part of South America operations, and I move over to Paulo Pianez, who will comment the highlights on sustainability.

[Paulo Pianez, executive]

Thank you, Rui. This is one more quarter where our journey in sustainable development shows to be consistent and the results prove that. Through the Marfrig g Verde+ program that began 3 years ago that the company has been showing its real capacity to transform Brazilian livestock production associated to climate and nature-based solutions.

Among the results achieved, Marfrig advances in the most challenging topic, traceability, 100% of direct suppliers have already been monitored and controlled by satellite. In Q3 2023, we reached 85% of indirect suppliers in the Amazon region and 71% in the Cerrado, making sure that the cattle bought by the company doesn't come from deforested areas, indigenous lands, conservation units, areas with social and environmental embargoes or they are associated with [ slave work ].

Over 30 million hectares monitor daily, greater than the U.K. or the state of CEPEA – São Paulo. Still on the traceability front, Marfrig for the 12th consecutive year, achieved 100% conformity in the audit in terms of the public livestock commitment that we established with Greenpeace in 2009. The report reassures our practices which reflects the effort made by the company in the vast sustainability practices in controlling its supply chain.

Continuing our strategy to set partnerships with highly capable companies that are recognized in their areas, Marfrig and IDH (Initiative for Sustainable Trade) signed a contract of EUR 1.75 million, Marfrig will invest in the expansion of the Sustainable Calf Protocol in Mato Grosso, specifically in the Juruena Valley in the heart of the Amazon region to produce calf sustainably, supporting small producers, providing technical assistance and technology that are needed to transform the way they produce.

Still in the Marfrig Verde+ program that includes inclusion and legalization of producers. 3,845 farms have been reincluded since 2021, up until now, suppliers that are now in line with our production commitments, that is 100% free from deforestation. FAIRR initiative recently published its sixth e Coller FAIRR Protein Producer Index, where they assessed the 60 largest global publicly traded protein company. Marfrig maintained its leadership position as the only company in the beef protein company classified as low risk.

In the overall ranking, we ranked first among companies industry and the fourth place among the 60 that are assessed. We're recognized as best practice in sustainability, governance and food security. We went up 7 percentage points in the overall index showing the evolution and the performance of the company and 8 out of the 10 pillars that are assessed.

FAIRR initiative is a collaborative network headquartered in London, made up of over 370 investors internationally with over $70 trillion in assets under management. Our consistency is proven by the results we achieved and by international assessments. We are a reference in this topic, while contributing for the development of a low-carbon economy and the maintenance and recovery of the diversity in the areas where we operate.

I now turn it over to Tang who will talk about our financial results.

[Tang David, executive]

Thank you, Paulo. In the next slides, we will present the consolidated managerial financial results for Marfrig for the quarter concluded in third quarter 2023.

Slide #13, the graph on the left, third quarter '23, we generated consolidated net revenue of BRL 35.7 billion. 39% was generated by BRF, 46% in North America and 15% in South America. On this quarter, 76% of net revenue was related to dollar plus other strong currencies and 24% was in BRL.

On the graph on the right, we generated in the third quarter of '23, BRL 2.6 billion of consolidated adjusted EBITDA with a margin of 7.2%. One more solid quarterly result that confirms our targeted strategy in segments with greater resilience, higher added value and lower volatility considering a challenging scenario.

Slide #14, we present the generation of free cash. In the third quarter of '23, the operating cash flow consolidated considering the BRL 1.5 billion receivables of the sales of the assets was positive for BRL 5.225 million (sic) [BRL 5.225 billion]. Investments in the period were BRL 2.2 billion, out of which BRL 1.4 billion in increase of shares in BRF. The amount of expenses with financial expenses was BRL 1 billion. As such, resulting in a free cash flow for the quarter of BRL 1.9 billion, positive.

Slide 15, net debt and leverage. Consolidated net debt was at $6.7 billion with a reduction of approximately 18% when compared to the second quarter of '23, explained by the cash generated in the period and the capital injection which took place in BRF, an increase in private capital in Marfrig. The leverage index measured between the net debt and adjusted EBITDA in the last 12 months was 3.94x and -- 3.91x in real and 3.94x in dollars.

Slide #16, demonstrates the pro forma effect considering the balance of the sales of assets at the end of August. As a comparison, adjusting the indicators of the amounts to be received, which means BRL 6 billion with the consolidated debt has decreased to BRL 27.6 billion, $5.5 billion, which represent a leveraging index of 3.21x in real, 3.23x in USD.

Next Slide #17, we present the profile of our debt. Our cash position at the end of third quarter '23 totaled $4.7 billion. We have there included the increase in capital accomplished in BRF in Marfrig. So we have availability to cover all of the accounts for the next 4 years. Additionally, we have performed operations in the market to elongate the deadlines of our bonds and reducing the financial cost of Marfrig.

Highlights: Issuance of debentures that are not convertible, BRL 500 million. Second, a bonus of $535 million PPE, public partnerships, total duration of 5 years. And third, also concluded the extension of the deadline for 2028 increased the amount that's available for the National Beef. Those operations highlight our commitment with financial solidity and the commitment of value generation to our shareholders.

[Operator]

[Operator Instructions] Our first question from Ricardo Alves, Morgan Stanley.

[Ricardo Alves, analyst]

I'm going to begin with the question over to Tim, about North America. We have had this discussion a few times, especially this moment of the cycle that we started in 2023 with a backdrop of lower offerings of animals of the cattle. But I would like to know if the company, if you, Tim, think there's room for the packers as a whole for the industry to adjust their operations going lower in this backdrop of limited cattle offered starting 2024 with outlook of a tight outlook for animals for slaughter. Internally, in Marfrig, do you see room to do more of that? Are you already operating at a level that you consider appropriate?

And my second question for South America would be more specifically about the breakdown that you provide about the region, the EBITDA, almost BRL 480 million for continued operations. I'd like to know if you can give more details about the operation itself, product, brand channel, whatever the factors that you think that -- the determining factor, average pricing, considering the comment of 38% added value, if I'm not mistaken? So what could explain that difference in margin, such a high difference in margins related to the assets that were sold?

And the other side of the question, why are the sold assets operating with a margin much lower than 10% with the cost of beef low. So that would help us to understand the dynamics of the assets that were maintained and the assets that were sold. Of course, you can't talk about margin because of intercompany sales, but the discrepancy is big. It seems that there might be something structural, something significant in that difference.

[Unknown Executive]

Tim, over to you.

[Timothy Klein, executive]

Yes. So I'll answer your question. The industry does adjust production levels based on supply of cattle. And we are seeing that, as we speak, as cattle supplies tightened up, hours are being reduced. Just in terms of reference, typically, our industry runs if the cattle were there 6 days a week, 48 hours. And we can go all the way down to 36 hours without penalty, which is a 25% reduction. When I say penalty, I mean, labor cost penalty. So we have the ability as an industry to adjust to cattle supplies going up or down and feel comfortable that there are enough cattle to support the industry running at 36 hours a week.

[Unknown Executive]

Let me add to that, in our case, going from 48 hours to 36 hours is a 25% reduction.

[Rui Mendonca, executive]

So Ricardo, good afternoon. We talked a little bit about the results of the continued operations, but as a result as a whole, that came in strong. I think we could list 6 reasons. First, the decrease in the price of beef. Second, percentage of added value hit strong continued operation 38%. And when we talk about added value. I'm talking about brands. In Brazil, for example, we reached 40% of sales with brands in the domestic market and processed, industrialized, representing boxed 20% in South America and they work with a much better price stability in moments such as this one.

We can also mention the diversification in markets. You saw that the share of China decreased from more than 50% in the third quarter of '22 down to 25% of total revenue in this quarter '23. So showing clearly that -- for China, we will send the cuts of beef that are more profitable. So diversifying sales between domestic and foreign market, China, U.S., Europe, it's a constant bit of work and very much responsible for this result.

I don't want to be forgetful of our operating efficiency plan. Constant work we've been putting together. It's a cumulative work. Every gain that we obtain adds to the future gain. So it's an important part of this result. And -- there's an aspect of Marfrig, which solid partnerships, both boxed as well as food, retail, wholesale besides brands and strong partnerships with our clients. That's one of the reasons for us avoiding seasonality, keeping a much more stable result.

And a one-off point here, it's important to highlight maybe for this quarter, specifically greater advantage, is the boxed, processed, we have long-term contracts. And when there's a decrease in raw materials such as what happened, you're still capturing higher margins, obviously, that is offset in time. It's a smaller factor, but it was also important in this quarter.

[Operator]

Our next question comes from Mr. Lucas Ferreira, JPMorgan.

[Lucas Ferreira, analyst]

A question over to Tim about demand of beef in the U.S. How you see the outlook on prices, considering that we have seen the prices of other commodities and other protein prices going down recently? Do you think that these high cutout levels are sustainable for the coming quarters? And if you have a scenario for next year in terms of business profitability, you mentioned that we expect for this cycle to be better than the previous ones. But can we think that the margins will be close to the digits, one digit that we see in the third quarter for this year?

And the other question is over to Rui. My question is about China. I know that it's less and less relevant now for the sales mix for the company but still relevant, and the expectation then is -- we see some level of recovery in prices, but the market is still very uncertain. With a relatively low demand from China, is that the scenario that you see for the remainder of the year? Do you have any telltales, more concrete telltales of Chinese recovery in demand?

[Timothy Klein, executive]

Yes. I'll answer the first question. Beef demand here in the U.S. has been very strong even at the higher cutout levels. Typically, what we see is -- if we're go into a time frame where prices are extremely high on some of the barbecue items, consumers will trade away and they'll buy some of the less expensive products. But overall, the cutout tends to hold together. We see that -- with higher prices, we see that in a recessionary period. So we're confident that the demand will continue to hold even at these -- the higher levels in cattle prices.

The second part of your question, as we look into 2024, USDA data would suggest that placements of cattle going into the feedlot the last few months should provide more cattle in Q1 of '24 than what we have right now. We can't really see beyond that other than to know that overall cattle supplies will continue to decline. Fed cattle supplies will continue to decline in our estimation sometime in late 2025 or '26. The margin structure as I said earlier, we expect it to be better than it was during the last cycle.

[Rui Mendonca, executive]

Lucas, this is Rui. I'm going to respond on prices for China. I mentioned that we had reduced our China share, but China is still important, largest global market. The expectation of USDA is for it to reach 3.5 million tonnes in the coming year, 35% of world imports. And yes, we intend to continue working strongly with China.

What I wanted to bring up is that when China decreases, we seek for another option. China actually, even with the current prices, it is still interesting considering the frontal part of cuts, frontal cuts. That's important. [indiscernible] and our expectations, the first quarter of next year, there will be an increase in prices in China or the next demand that's estimated in 3.5 million tonnes. And even in consumptions of our inventory, the more China improves their prices, we'll be doing more business in China. That's important to point out. That all industrial complexes that we have are important for China, Europe and the U.S. But China, should remain as an important market, and we believe in a price recovery in the coming year.

[Operator]

Our next question comes from Isabella Simonato, Bank of America.

[Isabella Simonato, analyst]

My apologies on the confusion. I would like to ask a quick question. If you could confirm what the CapEx was for Marfrig without BRF this quarter? You stopped giving the cash generation figure, if you had that also very simply looking at Marfrig stand-alone that helps.

And the second question, dig it back here. Marcos is here. When we look at the BRF performance versus Marfrig, there is a performance of BRF stocks. It's a -- and Marfrig has been making acquisitions which leads to believe that we've come to a point where buying Marfrig is a cheap way of you yourselves investing in BRF. So my question is, does it make sense instead of using the cash that Marfrig may generate to continue buying BRF? Or does it make sense for you to start making an investment in Marfrig's shares itself, considering that the stake that Marfrig has in BRF is not reflected in the price of the bond considering a buyback maybe? So those are the two questions.

[Unknown Executive]

CapEx, ex-BRF BRL 280 million in the quarter.

[Marcos dos Santos, executive]

Isabella, this is Marcos. First of all, our investment in BRF. We are truly convinced the company is at an attractive price. That's why we made these acquisitions in the last quarter. The average price is [ BRL 9.30 ], which also pushed down our average since the acquisition of BRF, which is around BRL 16 per share, which is an attractive price, cheap price. Of course, I'm biased. Marfrig at this price also, I think, it's an attractive price, and there are good investments in -- for both.

Now Marfrig is focused now in the receivables of Minerva $1.5 billion invested in BRF shares. And there was also an increase in capital for Marfrig, which made the company's financial situation very comfortable. If you look at levels of consolidated debt and the elongation of debt that the financial team has made the last quarter, this has been -- before -- based on financial conservative position. We're very comfortable. The Minerva business will be in force next year, $6 billion inflow. The idea is to decrease debt. Many opportunities for us to decrease the debt. I'm not sure if I've responded properly to all the questions, all the points. I think so.

[Isabella Simonato, analyst]

Just clarifying then. So the focus of money is to decrease the debt in Marfrig if you think BRF is still an attractive asset?

[Marcos dos Santos, executive]

Yes, that is correct. So we had the down payment amount, and that was -- yes.

[Operator]

Gustavo Troyano from Itaú BBA.

[Gustavo Troyano, analyst]

There are two points I'd like to exploit here. First, related to South America, and along that discussion, we see an expansion of margins, interesting this quarter. But looking forward, I'd like to explore if there are potentials for gains in margins thinking about this variable of capacity usage. I'd like to explore, looking forward with an improvement in the cycle, do you see room for the improvement in the usage of capacity in South America, if we could break it down, continued assets, noncontinued assets that would be interesting to understand the potential for remaining assets looking at 2024?

Second question, follow-up to Isa's question about cash generation. I'd like to focus a little bit on the working capital. Excluding BRF, doing the math, since that freeing up working capital in the quarter, there was some working capital freed up, how would you expect those lines varying going into the fourth quarter?

[Rui Mendonca, executive]

Gustavo, this is Rui. Now if we look at the occupation level, we have an average of continued operation of about 80%. And in discontinued operation of about 73%. We must remember that the discontinued operations include units in Rio Grande and Uruguay where seasonality is bigger. This is one of the main reasons for that difference.

Now to your question, certainly, we have an opportunity 75% to 80% of the current capacity used in the new model, we expect to operate at 90%. So we do have an opportunity to grow in the maintained operations.

[Tang David, executive]

Gustavo, this is Tang. About working capital. You have followed us. So in the past 4 quarters, we generated positive cash flow, releasing working capital. So that's our financial discipline. And in this quarter, we directed our efforts to the domestic market. That also contributes to the release of working capital. And there was -- we've -- price cuts at National Beef. Traditionally, Q3 is strong, which favors cash generation. To your point, looking forward, this is a continuous effort of our financial team really to generate positive cash flow.

[Operator]

Our next question from Ben from Barclays.

[Benjamin Theurer, analyst]

Actually, just one follow-up for Tim. In North America, can you help us understand a little bit better the current competitive dynamics in the U.S. and the beef industry just given that we've seen some of your peers not performing as well? Remind us what's the difference? And how should we think about just that relative performance, particularly as we head into 2024, which seems to be of more -- even more challenging year than what 2023 has been so far?

[Timothy Klein, executive]

I don't have access to their information to know for sure, but we feel that our business model is different, partly because we are smaller. So we're able to do things that the larger players can't do even though we've got disadvantage on economies of scale and cost. So I think one of the other big differences is our partnership with U.S. premium beef that provides us with the type of calf we need to continue supplying customers with our value-added programs or high-quality beef. So I would say that -- that's probably the biggest single difference between us and the competitors is our relationship and partnership with U.S. premium beef.

[Benjamin Theurer, analyst]

Okay. And from a shape of recovery, Tim, how do you think this is going to shake out? I think you said something around later '25, '26. But that would basically just the point of turn? Or is that the point where you should be back to come off an average margin by '26, then?

[Timothy Klein, executive]

I would characterize it as that's when we would start seeing the term, but it is not going to be a sharp increase in cattle number. It's going to be a slower recovery, I would guess, depending on when and how the retention takes place.

[Operator]

Our next question comes from Leonardo Alencar from XP.

[Leonardo Alencar, analyst]

I'd like to understand the point with Rui. Actually, when we look at the third quarter compared to the second quarter, the volume of domestic market grew significantly in probably an interesting bit of growth in the short amount of time. I'd like to understand a bit more, the strategy -- underlying strategy, if that greater volume will continue in the next quarters. Is there some kind of alignment for the holidays?

Also boxed beef, if you could help me a bit to understand the seasonality for boxed products and compared to fresh products. So Rui, we know it's a spread business and the dynamics of the price of cattle was favorable for margins, but also pulled the price of fresh beef down. And so could that become a natural competitor for boxed products given the improvement in the domestic market if the beef is a bit more competitive, but that could affect the strategy for boxed products?

And second, maybe more for Tang or Marcos, maybe. Regarding the plants that were sold or put to sale, if you have any expectations of closing for the operation. We know that it's a longer process. It depends on the [CADE], the Brazilian antitrust agency. So what kind of expectations do you have? Are you talking about first quarter, second quarter '24? What's kind of a time line for that, a bit of an analysis on your side?

[Rui Mendonca, executive]

This is Rui, speaking a bit about the domestic market. I use a magic word in this discussion. It's a spread. So when I mentioned that we separate the cuts, that's exactly what we do. You look at the specific cuts, the top sirloin. If it's better pricing in the domestic market, oh, come here. If in the next quarter, it's not, it will go to another destination. So in this quarter, we had opportunities in the internal market that we capture. So that was a decision that we make weekly in terms of targeting the production. That happened heavily.

The fact that we increased our share in branded products surely makes it easier. The partnerships I mentioned also help. And in the case of boxed products, there are 73% for the domestic market for Brazil and Argentina. We're also strong there with Bassi and [Vienissima!] brands. Those boxed products, they are not affected by, let's say, with a competition by the beef that are used in the production of hamburgers and canned beef, so short filters.

These processed products, it's a flat demand. There's no seasonality throughout the year, month-over-month. There's no big difference. So I think that's a major attractive aspect of a boxed product. There's this price stability, volume stability, which allows you to target and increase that volume, that occupancy growth in terms of capturing that opportunity. However, in the fresh beef market, that's one-off. You analyze every moment where the cuts are going to go, to which markets where the best trade results come from.

[Unknown Executive]

Leandro, about the antitrust agency part in Brazil. It's difficult to have an estimate. What I can say are the examples that we had in the past, our acquisition of BRF took 9 months for approval in the agency. That's what we expect for the next year, '24. I believe that should be the window, second quarter. But it's just an opinion, that depends significantly on who's going to be taking office in [indiscernible] and who's going to be nominated and all of that.

[Leonardo Alencar, analyst]

Okay. That's clear. Rui, just a follow-up question, if I may. So may I conclude that you were faster in capturing improvements in the domestic market in Brazil, faster than the competition. That's why this increase in the domestic market and consolidated margin for South America is better than your peers. Does that conclusion make sense?

[Timothy Klein, executive]

It's difficult to assess the speed of reaction of our competitors. I mentioned in the beginning and a number of other reasons. It's not just the targeting of domestic market. Obviously, we grew significantly in the U.S., the case of Uruguay, went all to Canada and Japan. So there were a number of actions, market brand actions, added value, operating efficiency, the way we work with solid partnerships with clients. So it's a pool of actions that are the daily foundation for decision-making, which led us to a better result now surely in terms of reaction pace or speed, I couldn't comment about that.

[Operator]

Our next question comes from Thiago from Pactual.

[Thiago Duarte, analyst]

I'd like to go back to the discussion of ongoing operations in South America in terms of the mix and contribution margins. I'd like to see if I understood the share of revenues, the ongoing assets. You talked about 38% of added value products, out of which close to half of that, you mentioned 20 percentage points of industrialized products, boxed products. And we're talking about 62% of lower added value products. And that's the point of my question.

I'd like to ask if we're talking about fresh products. I imagine that's the case nonbranded or lower brands, I'd like to understand how the margin of that product range in fresh products with lower added value. How does that compare to the trench of higher added value products? In other words, why is the margin of this 62% that you're not calling added value should have a much different margin when compared to assets that are being sold, operation assets that you have discontinued? That would be my first question.

Second question, segueing to a previous question about in the capital allocation for the future, lower debt, not being so leveraged. Marcos has made it clear his vision for BRF. A question that ever since this beginning, the first acquisitions of BRF and so forth, the question was always the level, the size of the share that you consider ideal. The answer that Marcos provided earlier, there was a willingness of deleveraging Marfrig in a perception that BRF has a lot of potential, still a very valuable asset in the current prices. I'd like to understand what we should think in terms of at the level that Marfrig, the stakes that Marfrig aspires to have in BRF, should it be targeting 50%, a bit more? Does it makes sense to go beyond that? Does it make sense to stop where it is? First, to think about it strategically about that movement that's come initially 20-something percent, 33%, now almost 48%?

[Rui Mendonca, executive]

Thiago. In those 60% of value-added products and boxed products, there are 4 factors that make them different, not just fresh products. Historically, we have mentioned the way we operate in interconnected platforms among the 3 South American countries, that allows us to capture different opportunities. That's a continued effort. We are all connected. Every country has different approvals to export, different opportunities.

Our operational efficiency program that began before I became a CEO here, we are still strong, paying attention to details. We achieved significant gains. And the third factor I wanted to mention is our industry, our choice to work with industrial complex is to reduce the fixed cost of the kilogram produced. So the industrial complex with higher volume and the higher level of boxed beef better using the deboning of the carcass are fundamental aspects, which will make those 60%, not just fresh meat, fresh beef.

Thiago, adding to Isabella's question and to your point, the investment we made at BRF, when we started making that investment, it was attractive. We only increased our stake because of the performance National Beef had, so it was through cash generation that we increased our stake at BRF in the past.

Last quarter, we had 32% stake. We were comfortable with that position. But then we had the opportunity of the Minerva group. We took $1.5 billion, and we invested at BRF, achieving 42% at the end of the quarter. And now we moved on to 47%. Today, we are super comfortable with that stake. So when I say that the price is attractive, it truly is. To reduce that is also attractive.

But let's see how the company will perform in the next quarters because first and foremost, we focus on financial discipline. So much so that this year, we decided to increase our capital at Marfrig and BRF, and we didn't pay out dividends focusing on financial discipline. So the investment at BRF also involved financial discipline because of Marfrig performed better generated cash. It was a joint decision. It was not a stand-alone decision. Our focus was to generate value.

[Thiago Duarte, analyst]

Rui, if you could share with us a number that might help us, those -- the remaining 62%. You gave us the revenue and the adjusted EBITDA of the continued operation. Can you talk about gross profit in Q3 of the continued operations?

[Rui Mendonca, executive]

We don't break that gross profit right now. We don't break it down but I can confirm is that in continued operations, we have the business model that we adopt as a winning business model.

[Operator]

The questions-and-answer session and results of Marfrig is concluded. If you have any questions, please send questions to the Investor Relations area through [e-mail]. We appreciate everyone's participation. Have a wonderful day.