Três Tentos Agroindustrial S/A (TTEN3) Earnings Call Transcript & Summary

Good morning to all, and welcome, everyone, to Três Tentos video call to announce the results relative to Q4 2023. Today with us, we have Mr. Luiz Osório Dumoncel, CEO and IRO; Joao Marcelo Dumoncel, Operational Officer; Cristiano Costa, CFO; and Eduardo Motter, IR Manager. This video conference is being recorded and it will be made available at the company's IR website, where you can also find the respective slide deck. If you need simultaneous translation, you can access the tool by clicking on the globe icon on the bottom part of your Zoom screen. For those getting the conference in English, you can mute the original Portuguese audio by clicking on original audio mute. [Operator Instructions] Before moving on, I'd like to say that forward-looking statements made during this call concerning the company's business outlook, financial and operating targets and projections to the future potential growth of the company are based on assumptions and beliefs of the company's management based on information currently available. Such forward-looking statements involve risks and uncertainties and therefore, depend on circumstances that may or may not materialize. Investors should have in mind that general economic conditions, other business conditions and other operating factors might affect the future performance of the company, and this leads to results that will differ materially from those expressed in these forward-looking statements. I'd like to turn the floor over to Mr. Luiz Osório Dumoncel. Please, Mr. Dumoncel, you may carry on.

Thank you. Good morning, everyone. I'm glad to once again join you as we share numbers relative to 2023. That's our objective today, and then we have some time for questions and answers and comments or we can drill down around specific points you may have. I'd like to start with a brief overview. I went back to 2020, our base year for our IPO, BRL 3.1 billion; in 2021, BRL 5.4 billion; 2022, BRL 6.9 billion. And now in 2023, we have reached BRL 9 billion. What does that mean? I did the math, that's a growth of 47.3% of growth. Those BRL 9 billion for 2023 are based on an increase in volume. We know we've been in this market, in the Brazilian agricultural market for our whole lives, Marcelo, myself and our team. We've been doing this our whole lives, and that growth in [ 2023 ] was driven by a growth in volumes of inputs, grains and also in our industrial capacity. So Três Tentos managed to reach that growth level, 31% based on those drivers. Amidst scenarios, which were at the very least quite challenging, we can mention prices, weather, climate. For the past 2 years, if you talk about climate, we had 2 severe historic drought periods, 2022 and 2023. And still, the company managed to deliver its IPO plan in a very structured way, actually, 2 years in advance to what was originally forecast. I'd like also to highlight the identification that growers have with the company, the extent to which they recognize, acknowledge the importance of the work we do within this ecosystem, which goes to prove and explain the volumes we have reached. About 2023, I also have to make clear that we are aware of the logistic bottlenecks we have in Brazilian agri business as a whole. Três Tentos has throughout time, along with its expansion plans, has been investing in infrastructure, in partnerships and processes, which are already some of them up and running, also in intelligence so that we can explore this market, which sometimes is more and sometimes less volatile. But in any event, it remains volatile to some extent and the company has become increasingly more prepared to face that volatility, and that's how we expand in a very cautious and safe manner. This new growth cycle, '24-'30, which we announced on January 5, I'd like to comment a few and then we can explore in more detail. This is just my first remarks. But the company has been preparing itself extensively for this. So when we expand, when we realized that we were going to anticipate our expansion plan as forecast by the IPO, we started to work that would only start in 2024, we started that in 2022. So we pushed it back by 2 years, and we'll go into more details as we move along the presentation, especially, as I said, with an eye at the company's robustness and safety. Next, please. Some large numbers. I'd like to call your attention to the fourth quarter of 2023. That's the moment where we grossed BRL 3.03 billion, an absolute record in terms of quarterly revenue. That, of course, impacts 2024 with our units already up and running, not in full steam but in a much better position than in the first half of 2023. We have our industrial plant on BR-163 in Vera, this one going full steam, and 2 plants here in Rio Grande do Sul also up and running. So this fourth quarter of 2023, where we had EBITDA levels of BRL 215 million when compared with 2022, it's difficult to even think about that. I'd like to compare the fourth quarter of 2023 with the third quarter of last year and second quarter and first quarter of last year and even in the third quarter of 2022 because the fourth quarter of 2023 was extraordinary by all accounts, sometimes with price variations playing in our favor, sometimes not. But irrespective of the scenario, Três Tentos has managed to deliver consistent figures, figures that bring about safety and reassurance to our partners, especially for a company that works across an ecosystem, which continues to grow, continues to bring about new technologies. And at the same time, as I said, presents some level of volatility. As for gross profit, adjusted EBITDA and net income. I'd like to reinforce that those are indicators that translate the reality, the challenges that we faced last year. And at the same time, I'd like to emphasize that it also shows the company's ability to deal with those challenging scenarios, always in a very reassuring manner, as I said, and that's what sets us apart in the market that provides us with a lot of confidence as we look forward. I'd like to turn the conference over now to Joao Marcelo, who will go into more detail about the numbers. And then Cristiano will take over. And then at the end, I'll be back for final comments or questions you may have. Thank you. Joao, over to you.

Good morning, everyone. I'm very happy and excited to be here this morning with you to share with you numbers relative to the fourth quarter and the year 2023 to emphasize what Luiz has just mentioned. Of course, always paying attention to this challenging scenario we faced last year in agribusiness, and a special emphasis on the south of Brazil with this crop failure that we had, drought issues we had both in 2022 and 2023, it's still great numbers. A main highlight I'd like to share with you all is an increase in revenue we had, especially around grains and industry, especially coming from higher volumes. And that's very important for us. As you know, it's an important driver. So revenue, as you can see in inputs, revenue was sort of flat. That, of course, was an offsetting of volumes when we take into account the drop in prices across all inputs. And then under grains, we saw an important growth in revenue, which was even higher, driven by an increase in volume as well. And also under industry, we, even in the last quarter, we had Vera's plant being ramped up. That justifies the results, and that shows the strength of the company in terms of market share. Três Tentos, with its positioning, being recognized and increasingly more consolidated across traditional markets, but especially across those markets, which are new to us, that can be shown by this increase in volume, there is clearly an increase in market share, talking about new areas and more share in already mature areas. So the strength of our units, our sales team, our value proposition, they are increasingly more powerful to our customers. And that's our recipe, if you will. People ask us how can we grow so vigorously, occupy so much space where other players cannot, at least not at the same pace, that's driven by our value proposition, which year after year, as we consolidate in the market, it becomes more and more acknowledged by the market. And then this all shows, when you look at inputs -- sorry, when you look at the different segments, inputs, grains and industry, as Luiz said, the strength of the synergy across all our businesses. So Três Tentos, as we mentioned, that synergy along the ecosystem translates into great numbers. In the next slide, if I may. We look further back in the past to analyze gross margins to see what kind of insights we could extract. So looking at this snapshot, going back to 2011, we see that industry starting in 2014. And then the other 2 dimensions going further back, 2011. We can see that margins and businesses have seen variations, of course, but we have managed to keep a certain level of stability as each pillar complements the other. And that's what provides the strength of our results. So we can clearly see that for inputs, the inputs saw higher variations than the other segments in 2023, specifically, but we know that we have post-pandemic effect, the scarcity of inputs we suffered in 2022, especially late '21, early '22, and that reflected in '23, of course. But as Luiz has already mentioned, the fourth quarter of 2023 has already shown some recovery around inputs, resuming historical levels for profitability in that dimension, showing that the company is doing its homework. We have the lowest inventories for the last 10 or 12 quarters in a row in terms of input inventory, which shows that the company is ready to start a new cycle. This will, of course, bring about even better numbers, numbers that will take us back to historical levels. As for grains, in the middle of the page, we are around our historical average. But we could highlight that it could have an even better results, especially on wheat, the 2022 crop for wheat in the South saw a failure because of excessive rainfall late in the year, which coincided with the harvesting of wheat, which affected quality and volume for wheat, which historically has contributed significantly. But still, the company was able to maintain stable profitability levels. And under the industry dimension, we also have a positive forecast, especially as we start our plant in Mato Grosso. We were very active in the fourth quarter, working at close to full steam, showing the strength of the company has now as we reach full capacity in industry. We can dilute costs, we can improve profit, we can have better access to markets, and that's all reinforced by this forecast of having a good crop in the south, the B14 for biodiesel, good expectations. And of course, the strength around this ecosystem, as I mentioned, which will help provide even better results. I'd like now to turn the floor over to Cristiano, who will give a little more color on the financial figures. Cristiano, over to you.

Good morning, everyone. I'll be talking about this breakdown. We've been talking about the year, and we saw a drop in the adjusted EBITDA margin driven by 2 factors mainly, which lead to this drop or this reduction. Number one, Joao Marcelo has already touched upon that, which is a drop in gross margin. So the breakdown is the following: loss, something, 3.6 percentage points, 2.1% of which come from a drop in gross margin in adjusted terms, led or driven mainly by lower margins in the input segments and also a little bit in grains, as Joao Marcelo mentioned, because of the wheat issue, especially in the fourth quarter, which was just mentioned. And for inputs, throughout the whole year, it's important to say that Três Tentos did its homework, reduced inventories, was able to weather this moment, but the market as a whole is still very competitive. A second element or component to explain this drop in margin is an increase in our sales expenses as a proportion of expenses. I'd like to please move to the next slide, if we may, so that we can see a breakdown of those numbers, SG&A numbers, which already reflects a bit of the impact on logistics in Mato Grosso, and that includes longer distances to be covered and also a higher volume being shipped in a scenario where we saw a drop in prices. This decompression, if you will, of prices throughout the year had an impact on SG&A as we have higher volumes within an environment of lower prices. That also reflects an increase in freight, but we expect all of that to reflect an increase in gross margin. So when we look at the year, and please, I'd like to call your attention to the right-hand side in the bottom of the slide, where we select SG&A as a proportion of logistics, personnel and expenses, and we see that we closed the year with an increase of 1.6% in SG&A as a whole, but the breakdown is that main increase came from logistics, 1.9% and for personnel expenses and other. We had an operational gain actually. So the increase in SG&A is closely linked to logistics. But as Luiz mentioned, it's important to look at how we have evolved from the third quarter to the fourth quarter, then we can compare operations which has been ongoing in Mato Grosso apples with apples, Vera, meal exports and shipping towards the north. So we see an increase in SG&A logistics from the third to the fourth quarter. We moved from 4.3% to 5%, and we see an increase of 0.7% in our SG&A in logistics. So we're looking at adjusted gross margin for the third quarter of 2023 as we move to the fourth quarter, we see a gain in gross margins of 3.4 percentage points. What do I mean by that? We are covering larger distances. We are growing our revenue and growing volumes, but our gain in gross margins more than offsets an increase in logistics expenses. So the questions or the question we have been asking ourselves is, does this SG&A at this level in the fourth quarter, 9.8%, is it here to stay or is it temporary? So we have temporary elements, components in the fourth quarter. We had some components for that amount, which brought about higher expenses than planned because of the North Arch, as we call it, and logistics issues. But in our view, whatever the increase in expenses going forward, it will be more than offset by a gain in gross margins. So that's how we see the future and we pursue that target every day, we pursue efficiency every day, given that in other areas of the company, we do the same and we have delivered those efficiencies. So we are now trying to break this down. That's the first time we do that to explain that whatever increase we see in expenses with logistics going forward will be, as I said, more than offset by gains in gross margins, and we'll work to bring those costs down, of course, as a function of revenue. Early on in the year, we have already observed reductions in freight and other tariffs that might bring about a drop in SG&A for logistics as early as in the second quarter. So we can move please to the next slide so that you can have a better look of the final result. We saw a drop in the EBITDA margin. But overall, the company fared really well financially throughout the year. We generated cash. We had a reduction in inventory, which translated into cash. We had growers delaying grain purchases. They expected a higher valuation appreciation. So they delayed their purchases and that led to an increase of higher cash generation, and we closed the year with a net debt in consolidated terms of only BRL 46 million. That's 0.1% of our total revenues, so that's a very, very low figure, which places us in a very reassuring position as we start a new growth cycle. And it's important to say that throughout the process, throughout the year, we were able to not only reduce net debt, we also decreased the rates of our fundings, and we have extended our debt. So very good that management, despite all the challenges, which were mentioned by Luiz and Joao, we closed the year with a net debt over EBITDA ratio close to 0. We have extended our debt and with a cash position which is ready to kick off this new growth cycle and also, of course, to meet any commitments, obligations we may have with partners and suppliers in the coming 6 months, that's when we're going to be harvesting this new crop. We are confident in this new crop and any improvement we can see in the overall scenario that can already be seen in Mato Grosso. But to talk about the future and outlook, I turn the floor back over to Joao Marcelo, who will complement my presentation. Over to you, Joao.

Along the same lines, just a highlight on January 15, we talked about the new growth cycle '24-'30, that of course, reinforces our strategic commitment to grow across our ecosystem. So our business model is very much based on this ecosystem as we start to work in a new region, which will replicate not only what we do already in the South, but the whole ecosystem of the company in the Vale do Araguaia, where we are now starting with the corn ethanol industry, the corn ethanol industry as the main pillar for this ecosystem in that region. That's a strategy which is in line with what the company already does. The reinforcement of a market has been proven to be quite resilient and vigorous, which is also complementary to our other businesses, vegetable proteins and biofuels, also in line with our logistics expectations with a JV with Caramuru at the port terminal in Miritituba, which also complements our investments and logistics, our focus on logistics. Also industrial expansions, which will lead us to an important growth of about 60% of our crushing capacity for soybeans. And of course, very efficient CapEx. We're talking about complementary investments, as I said, always seeking to optimize and lead those industries to increasingly higher or increasingly more efficient levels in terms of production capacity. And of course, the new stores, the stores are an integral part of the ecosystem's expansion, especially in this new region, but not only there, in other regions as well. So as Cristiano said, we start from a very robust financial position with our feet on the ground and ready to continue to grow. And to do that, we have to reinforce what we have always done. We are a growth company, a results-based company. As Luiz mentioned earlier in the call, our CAGR, our historical CAGR, we have already mentioned that CAGR, and the more recent numbers of the post-IPO phase is even higher than our 10-year average. It's from 3 to 9 in 3 years, and that pace will not slow down. The plan is quite well designed, well consolidated, and we have proof of our power, our ability to accomplish and deliver all of that. We already have that credit with the market because of the IPO. We delivered the plan in 2 years instead of 5, and that gives us that confidence in the future scenario. Of course, the market will have its ups and downs throughout the years. But as we look to a broader scenario, as we look at the company's structure, the company's financial solidity, and if we look from a perspective comparing with the market, we can only be very excited and very confident as we look ahead for 2024. So it's a new cycle, as I said, a new growth cycle. And that's the main lever, I could say, to this as we transition from 2023 to 2024, and we take the first steps for this new cycle. In 2024, as Luiz Osório said, will continue in our favor. At 2024 coming from -- we expect a normal crop, 22 million tons, combining the crops of 2022 and '23 together, all of that in 1 year, 2024. So good numbers, crops are looking good, poised to be harvested, providing excellent results for our local growers. Our farmer partners have already invested, and they are now finalizing the management for this year's crop. As we have a normal soybean crop, much, much better in corn than we had last year, we can already have -- see those results in January, and Mato Grosso, which is contributing increasingly more for the company. So as we continue to expand our areas, continue to open new stores, we are focused on recovering margins, not only for inputs, but also in terms of inventory management with a higher [ productibility ] level. And as we increase our share in the market, we are very happy to see that happening now. And as for margins in Industry, for industry and grains, we are focused, as Luiz said, on logistics improvements. I'd like to emphasize before we close, we have started the year, January 1, with the 3 industrial plants working in full capacity. So today, we're crushing 6,600 tons of soybean a day, most of which originated from growers partners. And I'd like to repeat to reinforce how important it is to have an ecosystem in place where our client sees value in the work that we offer and deliver on our technical assistance, our technicians are in the field, providing all the support they need in management, combined with high-quality products that leads farmers to produce more per hectare or at least they are able to mitigate climate risks. So we are there, hand-in-hand with growers, helping them manage and produce more. And those clients are our supplies of raw material for those industries. And that becomes even clearer when we're able to mitigate risks and work around volatility issues in the market and pricing conditions, we are quite confident. We can now at least move to the Q&A. Thank you all for your attention. I remain available for questions you may have. Thank you. Over to the operator, please.

[Operator Instructions] Our first question from Matheus Enfeldt from UBS.

My first question, for retail margins. I'd like to understand where can we expect that margin to stabilize? We understand some difficulties faced last year, second, third quarter, but we were expecting a margin recovery in the fourth quarter and for 2024, which may not materialize. When you look from a seasonal standpoint, the company had a margin of 12.5%, below average fourth quarter in retail. But I'd like to understand the breakdown of that lower margin for the fourth quarter in retail. How much of that can be chalked up to the seasonality issues and how much of those 12.5% come from the fact that in Mato Grosso, those margins are lower historically? And as you look to 2024, what -- how much of that can be addressed or if we should expect lower margins for retail as we move forward? And then a second question, I'd like to repeat the question I've asked in the past 2 earnings calls. As I try to understand the speed of normalization for margins, not only for retail now, but also margins for the industry pillar. We saw margins being pressured in logistics and retail. And some of the company's remarks were about initiatives you're putting in place. But I'd like to understand the pace at which the company understands you can deliver or go back to historical leverage, especially for retail? And what would be the time line for a more normalized logistics costs if that's the case? Can you expect them to see at a level of 5% below revenue? Those are my 2 questions.

Thank you, Matheus, for your questions. I'm going to make an initial remark for the retail margin, then I'll turn it over to Joao Marcelo, who will give you more information. 80% of the company's revenue from input come from Rio Grande do Sul. And in 2022 and 2023, we had terrible years in terms of climate, as you know. And of course, products were not used in January, February of those years by local growers because of weather conditions. And of course, that translated into a mix of issues where fertilizers accounted for more of the share. And when you include seeds, fertilizers and crop protection products, fertilizers have a lower margin. That's my contribution for your first question. But I'd like Marcelo to complement my answer, and then we can move on to your second question as you talk about the pace of normalization for margins going forward. Joao?

Okay, Matheus, thank you for your question. The point raised by Joao or by Luiz, sorry, around the mix is very important. In addition to climate issues, those were 2 years, as I mentioned before, 2 years, which were quite impacted by the sudden variation we had in prices. First, hike in prices, lack of some products, some inputs. And then after that, a drop, which was also sharp in prices, a hike and then a drop, which made managing inventory as a very challenging task. So that's the scenario that came about, especially in the second half of 2022. Maybe in 2022, under a more positive bias, in then in 2023, a more negative bias. That's when prices resumed or dropped really fast, and that caught companies off guard, having higher level or higher cost inventories. Mato Grosso, to your point, Mato Grosso is structurally -- represents lower margins. But that's not the margins we're working with. It's not the margin levels we understand that's been normalized. The recovery we saw in the fourth quarter of last year already shows or sheds some light on a larger recovery. We expect to see a level of stabilization and a number, it would be premature to give you a number, but I am quite confident, the company is confident that the recovery that we saw in the fourth quarter will continue the norm throughout the year 2024 because of the reasons I've mentioned, an improving product mix and improving the crops which, of course, influences the mix and it adds to the mix higher added value products and also more regular, more managed inventories in a more stable price dynamics in terms of purchases and resale. That's the main restructure. And also, I have to mention our technological package that we are now delivering to growers. This will be reinforced, and that's why we are not pessimistic about what is in Mato Grosso. Maybe in the first or second year, as we start, growers are not yet recognizing that value offering. And that's the strength that we have, that we've shown, which is our value-added in terms of tools, technical assistance, barter, all that connection with our whole ecosystem. As to your second point, if I may, and then I'll give it back to Luiz. In terms of margins across the other segments, especially Industry, I see that, that growth that the Vera plant being ramped up, of course, that brings about cost and expense, which is natural to starting up a plant, and this will take some time to dilute. We start with higher costs, our full cost, if you will, as opposed to a volume which is not still full, and then the efficiency levels are still being -- still in need to be fine-tuned. So again, what we saw in the fourth quarter and what we will see in the year 2024 will be completely different in terms of efficiency and in terms of cost management. And this, of course, will bring a different light to the industry dimensions numbers.

I'd like to add, Matheus, that we had an increase in logistics costs in Brazil early last year and by mid last year and as we were still -- we didn't know that the failure in Mato Grosso was not defined. Mato Grosso, we'll harvest 40 million tons. So we'll still have more than enough volume to meet our obligations for the industries to run and to export. But there was a significant failure when compared to what was initially forecast. With that, logistics costs were appreciated or appreciated. And then that cost was adjusted. At the same time, we saw a drop in commodities prices for soybeans, corn and wheat. When we saw that logistics did not came at the same pace, logistics costs. So when you talk -- when you ask, when is this going to be normalized going forward, third quarter, fourth quarter, going forward? We see that normalizing scene in the near future, and we see a fourth quarter with an industry presenting a margin of 16.5% going back to a normal level. That's where we believe we will be in normal levels. Again, without intense volatilities that we saw during the post-pandemic periods or as the war in Ukraine was starting, those were very volatile moments. But today, we see a more normalized period going forward.

Next question comes from Pedro Fonseca from XP.

I have 2 questions. First, about logistics. Do you believe that the drought in the North has affected logistics costs? If so, could you quantify how much of that drought has impacted logistics costs, put a number on it, if you could? What goes through new contracts for transportation in the North? Also, still about inputs, I'd like to hear from you, where do you see inventory levels for the industry, for the sector as a whole? You've done a great job in inventory adjustments. You have reached very low levels. But if you look at the sector as a whole, do you have any idea, any color around the inventory level for the whole sector? So when can we expect margins for the business to go back to normal? Some sources say that the historical levels would be 15%. What can you tell us in relation to that? Does that make sense?

Good morning, Pedro. Thank you for your question. I'll be sort of mediating the debate, and I'll turn the floor over to those who I think are more prepared to address a different question. So about your first question, Cristiano will be able to help us out in terms of logistics and then the drought in the North, how much has that affected our business in the North. I do not -- if you could repeat perhaps your comment on the partnership we have with [ Hidrovias ]. I didn't hear that question. Well, if you could repeat that, Pedro, please?

Yes, Luiz. Sorry, my audio is not really good. If you could walk us through the contract that you have with [ Hidrovias ]?

I can talk about the take-or-pay contract with [ Hidrovias ]. The contract or the agreement is already signed. I'm not going to be mentioning numbers, of course, but it's a great partner we have as we are good partners of T39, [ Rumo, TRO, ] because we are located on BR-163 as the North meets the South, we are able to negotiate well with those transportation partners. And we are very -- working very close with those logistics companies. So our exit to the North using [ Hidrovias ] and then to the south via [ T39 and Rumo ], those partnerships are well designed. And not to mention Rio Grande do Sul, the port of Rio Grande and other terminals, also doing well. Our relationships go back a long time with those partners. But as to your question about the impacts of the drought in the North, I'd like to ask Cristiano to help us out, and then Joao Marcelo can complement to talk about inputs.

Well, Pedro, as to the Arco Norte, the North, we were impacted in October and November by the drought. There was a moment we could not ship through that route. We -- he worked the route going direct from Barcarena and other ports in the region. And that, of course, had an impact. Out of that 0.7 that you mentioned, when we look at the number 5, logistics and SG&A have 2 components, right? One coming from expenses, which are costs involved in rerouting those shipments. And at the same time, another component, which is a decrease in revenue because of the crop failure in wheat, which historically has a very good margin. And wheat, of course, drive our revenue. And of course, the added logistics, of course. So from 4.3% that I mentioned in the third quarter to the fourth quarter, of course, brings that temporary component that should not be repeated. As for the [ Hidrovias ] agreement, I was talking to our logistics colleague here. What we can tell you is that we have met all the volumes we had agreed upon with [ Hidrovias ]. So [ Hidrovias ] has been a great partner and nothing changes on that front. You had also asked about those contracts, those details. We're not going to go into details, of course. But what I can tell you is that we have met all the provisions in terms of volumes and it was a great partnership. And those challenges in the North, we do not expect it to be repeated. So we know the effect. As I said, it is present in those 4.3%. We cannot say it's not because it is there, but that should not be repeated. Okay, Pedro, anything else you'd like to ask? Joao or Luiz, anything to add in terms of inventory? The inventory, the overall inventory levels for the sector. I wouldn't know what to say. What I can tell you is that we have been working hard to manage inventory, to bring inventories down. And oftentimes, we ran risks in the past because of specific moments. We had higher inventory because of different moments, but this has passed. We're now going through a new moment. Our inventory management intelligence has been improving year upon year, and that, of course, reflects in our current numbers. As for the inventory levels question, Pedro, of course, the whole sector has been working to adjust inventory levels. We do not have numbers, of course, overall numbers for the sector. But we can see, when you look at the market offerings, we can see that pressure is no longer there. Now it's more a pressure coming from normal regular competitive pressures, no longer driven by untimely higher inventory levels. I'd say inventory levels are adequate in the sector right now. Maybe one or other company may have an issue, but they are all converging towards more normal inventory levels. And in our case, as I mentioned, we had climate issues in the South. So as Luiz said, 80% is in the South. It used to be higher than that. So we had expensive inventory and difficulties in diluting because there was no consumption or a reduced consumption because of climate issues. But that also in Rio Grande, as we move forward to a new year with a normal "crop" expected good rainfall levels, good demand level. So the whole sector, I'd say, is well positioned, well-adjusted to healthier inventory levels.

Next question comes from Gabriel Barra from Citi.

Two questions on my side. We talked about margins. We talked about SG&A levels. We saw very high return levels at the IPO moment. Those numbers fell short of what was expected throughout investment cycles, perhaps due to specific difficulties faced last year. So if you could help us better understand that number, what would be a more normalized level for ROIC returns for Três Tentos ahead? We've only had 2 quarters having contributions from Vera, we see volumes increasing. It seems to be a turning point in terms of returns. So I'd like to understand, what would be, in your opinion, a more normalized return level for 2024, 2025 in terms of, again, in terms of ROIC? Also, when I look at the sector as a whole and when we compare you with the other players, we've seen a default risk quite high. But for you guys, it seems to be a very low number. Even if it increases, it's still significantly lower than default risk levels we see in the competition. So I'd like to hear from you. Am I reading this correctly? Does that create opportunities, gaining more market share given potential difficulties the competition may be facing? Those are my 2 questions. And if you could, a follow-up on margins. There seems to be an offset when you compare sales and gross margins. I'd like to understand if there is a trend, a long-term trend? So the idea is not to offset it, to correct, to have a positive number when you compare both lines. Is that the case or have I gotten it wrong?

Okay, Gabriel. Thank you for your questions and comments. Of course, we do not want to offset. We want to have a positive figure for sales, and we are confident in that. About your first question on margins. The relationship, return on investment or invested capital, I'll ask Cristiano to talk about that. But I'd like to reinforce that we have been discussing thoroughly about that. ROIC and ROI, they are the company's main strengths. That's what reflects the work as we do as a team, and Cristiano will address that. And then as to your second question, I'd like to ask Joao Marcelo to help me out. He is the one who's focused on that, for the last 29 years to be frank. We never disconnect the commercial and the financial front as we walk hand in hand with growers, but Joao Marcelo will address that. Cristiano, over to you.

In terms of ROIC. Thank you for your question, Gabriel, for your question. I think you have 4 questions, if I'm not mistaken. I'll address the first one and give it back to Joao to talk about defaults in credit. As for ROIC, we have to be careful, right? We cannot give any guidance. But of course, ROIC for this year was affected by the challenging year we had. We expect that going forward, the company will resume its historical levels in terms of returns. Of course, we cannot give you a number or a date of when that will happen, but we have Vera being ramped up, we'll be running the first half of 2024, which was not the case in the first half of 2023. That's the first important point to take into account. Also, all our Mato Grosso stores, which are now moving from a first to its second year, those stores will be maturing towards a full capacity running in terms of sales, market access, market share. And this will only mature in 2 years, 3 years. So we have expanded fast throughout 2022 and 2023, and that, of course, has an impact. Our exports program is just getting started. We had this challenge in the North, but we have a plan in place to reduce SG&A. As we've said, to your last question that it's not a trend to offset. We want to recover gross margins, not to offset losses. Also on the insights front, we saw, as I said, a delay in Rio Grande do Sul because of a delay in planting late last year. So we have a combination of elements that allows us to believe that 2024 will be a better year in terms of margins and results as a whole. So when you mentioned, turning point, that's how we see it. That's a turning point. And we expect -- expected to see that happening late last year, that was hampered because of the wheat situation. But we're coming close to that, to this turning point. And we are tirelessly pursuing recovering those margins. So our perception is that we'll improve ROIC levels throughout the coming few years. So back to Joao Marcelo for him to address default. Our team has been working hard to address defaults. And Joao, over to you.

As we said, Gabriel, liquidity and collection, that's been a priority at the company, a very strong focus on that. We have a very well-prepared team for that, working hard to do that. With all the commercial team involved, our commercial team is not disconnected from our credit/collection department. Of course, it is a challenging scenario, the drop in prices. A crop failure, of course, that's a given. That's the scenario we have in place. This has started last year. Actually, 2022, when Rio Grande do Sul, right, actually. So now looking at the whole country and see the drop in prices, but what we see going forward, as we said, that's an opportunity, 2 key points for the success of our company in terms of low default. We work very close with our clients and our value proposition, our offerings, which are all integrated, all of that combined explains our low default risk. And that gain in market share comes exactly from those opportunities, linked to our efficiency with our closeness with growers, with farmers. So we see a challenging scenario going forward, but we see that as an opportunity for Três Tentos.

If I may complement, Joao. In terms of ROIC, in all the numbers we analyze. We have to include investments relative to this new growth cycle. So we'll have 2 years, '24 and '25, we see that ethanol plant may ramp up. This was presented in January, the size of the investment and so on, that's the same account. It has to be clear, right? We'll see impacts coming from this new plant being ramped up for 2026. We have a new plant running, and this will be reflected only in 2026, okay? Also, Joao, the growth on -- in terms of the competition, His third question, Joao.

I think it's all good. Our time is almost up, and there are a few questions to be addressed. I think we're good, unless Gabriel wants any other complement?

No, it's all clear. All good.

Next question comes from Isabella Simonato from Bank of America.

My question has to do with profitability and returns. If I could rephrase the question which was asked, you are on the verge of starting a new growth cycle as you have announced, you announced last month. But speaking specifically about what you already do, both in retail and in industry. And based on what you've seen for the past 2 years, what lessons were learned from Mato Grosso and from the challenges that may have caught you by surprise? The fight for market share, logistics issues, that were surprising. What caught you off guard when you think about the pace of the expansion plan, when you think about ways to position yourselves in the market, acquiring new clients? What were the lessons learned for the past 2 years that could be used for the coming years as we see a more normalized margin level being achieved sooner than later? What kind of margin levels can we expect? How do you see that 2 years down the road now as the new cycle begins?

Thank you, Isabella, for your question. I'd like to ask Joao to answer the question with me. But before I turn it over to him, profitability and returns, those are topics we've been working on. We've been seeing improvements across those indicators in the fourth quarter. We see EBITDA going back to levels above 7%. I'd like to go back to the price volatility issues that I mentioned that led not only Inputs but industry and grains to suffer, if you will, some margin loss. So there are many takeaways we have take -- have accumulated for the past 29 years, not only 2 years, but 29. But especially after the IPO, when we started really to expand the company, we were able to execute phenomenally, I'd say. And there is still a lot of ground to cover in terms of structuring in new areas and getting things to work. In terms of being caught by surprise, we were caught by surprise by uncontrollable, unpredictable things. The war, the pandemic, of course, not controllable, but the effects lasted until last year, as you know, but that is a page, which was turned in our view. But lots of learnings for us to continue to grow, bringing in results, but especially, Isabella, that makes us ready to enjoy the positive moments that we know this industry provides. We have good demand, we have a captive fuel market. But as we go into a new region and talk to new growers, all of that remains a challenge for us, but a challenge that we have embraced in terms of creating value, delivering value to those farmers, those who have placed their faith on us. And I'd like to reinforce that this is happening, and that can be seen through our volumes. They continue to grow across all the company's sectors. But Joao Marcelo has something to contribute. Over to you, Joao.

Just as a complement, if I may. The main takeaway we have from the past years is that we are confident in the company's resilience in our management ability. We, as leaders of the company, we are sure that our model is resilient and profitable. If we look at the numbers, when compared to the market, to the sector, I think we stand out, no doubt. The company has once again delivered over BRL 0.5 billion in results. So when you compare that with all the challenges we faced, some coming from uncontrollable sources, not only the war and the pandemic, but of course, the climate as well, whether we weathered through all of that, not only with strength, but also providing delivering good results. So we are confident in our model, and we will deliver as we start up our efficiency, our gains, yields. And we have already shown that, and we will see that happening throughout 2024. I remember our motto here which is, the best is still or is yet to come. So the best is yet to come also in terms of numbers, okay.

Next question comes from [ Henrique Brustolin ] from BTG.

I have two questions. The first, looking at your trading margins, especially when you compare with quarter-on-quarter, which has not grown despite the higher wheat volume, which were the main offenders? Any specific driver that may have impacted the trading margins? And also about working capital, you closed the year with a working capital level which is very low, cash conversion cycle very low. How do you see that going forward? Considering the business seasonality, of course, when we think of the cash conversion cycle on an annual scale, should we expect that to continue at the same level?

[ Henrique ], thank you for your questions. About the trading margins, I'll start, and then I'll ask Joao Marcelo to complement the second question. We had several impacts that led to a drop and the lower drop in logistics costs when compared to input costs combined to climate issues that we mentioned, especially in the North as mentioned earlier in this call. And as to your second question, I'll ask Cristiano to also jump in, about the working capital issue, cash generation and so on. And we, of course, are always working to maintain those indicators at a high point. Please, Joao, over to you.

[ Henrique ] as to your 4Q margins around trading, of course, corn had an important impact, was a sales conversion that I mentioned because of logistics issue around corn, the second crop in Mato Grosso saw a change in sales, a [ CI fee ] for [ FOB ] swap. And that, of course, affected margins. So margins were lower because of that. For the corn business, we sold [ FOB. ] And part of that, did not add the freight amounts and especially because the wheat issue was a main contributor, a main offender because of the crop failure in Rio Grande and the drop in quality also. The wheat, which was actually produced, was not a wheat good for bread making but for feed making. So the added value was lower, right? That was stressed by Russia and Argentina coming back to the wheat market at a strong level. So that brought about more competitiveness late in [ 2023 ], which is much higher than at the end of 2022. So quality, more competition and corn being converted to FOB and the sales entry.

I can address the question about the cash management?

Yes. Go ahead, Cristiano.

Thank you, [ Henrique ], for your question. Yes, [ Henrique ], we want to have this to have a good year. There are several drivers. As I mentioned, farmers have delayed in planting. As for input retail, we have a sale mix with a lower payment term, higher cash payments, in other words. And we have another cycle for the first half of the year, where we will have farmers planting more to meet their obligations. And we also have our strong relationships with our partners, so we have prepared for that. But cash generation is happening, and we expect this to be one of the main engines for our performance throughout 2024. So we can continue this process of having debt under control to have a good inflow of resources of revenues as planned as we start our new growth cycle without the need of paying higher rates and so on. Cash generation, cash management, receivables, payments, we see all of that combined as a main strength of the company. So our intention is to continue to meet the plan. That's what is within our budget. So that's what our strength is, right, debt management, cash management.

Next question from [ Larissa ], Itau.

A quick follow-up, the last questions. One of the main strengths of the company is a very resilient cash generation, very positive numbers for 2023, especially as you plan to expand. So within this context, if you could comment on CapEx and what can you expect in terms of taxes payments for 2024?

Thank you for your question, [ Larissa ]. I'll go straight to Cristiano.

As for the CapEx question, thank you for the question. As for CapEx, we do have a plan in place to spend for our new stores. And as we start the company -- started the works in the new ethanol plant in Porto Alegre do Norte, this will unfold throughout the year. So as we announced last month, we have planned to raise funds and then to raise incentivized funds so that we have an interesting grace period early on in the process. So the idea is that the CapEx will come from 30% of own cash generation, 70% through debt, but a debt line through long-term adequate rates process. We see no risk around that. That's all within our CapEx planning. We work really hard under Joao Marcelo's lead to define our CapEx expenditures. Your second question was about taxes. We'll start having cash disbursements now, which we didn't have. But we have fiscal losses to be incorporated and other benefits on it. We are working to minimize cash disbursements, but we will have some. There's a predicted volume. Just to give you a glimpse, we are working with an effective rate of around 22% when compared to the previous year, and part of those 22%, which is not cash disbursement per se. So we are doing other tax studies. Our tax team has been working hard to minimize those costs and our accounting team as well so that we have no need to disburse high amounts of cash throughout the year. This should not have a negative effect. So it's a very good question.

This concludes the Q&A session. I'll turn the floor back over to Mr. Luiz Dumoncel for his final remarks. Over to you.

Just to thank you all for participating in yet another earnings call from the company. And a final message, it would be around our commitment with our shareholders, our commitment with our clients, suppliers, with the market as a whole. The company has a team of over 2,000 people in-house, highly committed, highly trained to deliver our numbers, our figures, our results, our team that is in continuous training, continuous improvement, a lot of grit, a lot of passion. We continue to grow, to work, as I said before, in a sector, which is key to society. That is food and renewable energy, right? That's the core of the company, the core of a team that stands out, that does professional serious work with a management that focuses on safety, on risk management, and the word solidity would be perhaps coming out in the first line of our definition. We are confident in the company, in the industry, in the sector, and let's move forward. Once again, thank you all for participating. Have a nice day, everyone.

Três Tentos earnings call for Q4 2023 is now over. The IR team remains available for questions or comments you may still have. Thank you for participating, and have all a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]