Good morning, everyone, and welcome to the Earnings Call relative to Q3 2023 Três Tentos. here with us today, we have Mr. João Marcelo Dumoncel, Operational Vice President, Cristiano Costa, CFO, and Eduardo Huston , RI Officer. This conference is being recorded and will be made available at the company's RI website, where you can also find the slide deck. For those of you who need simultaneous translation, that tool is available by pressing on the globe icon at the bottom part of your Zoom screen, where it says Interpretation. For those listening to the conference in English, you can also mute the original audio by clicking on Mute Original Audio. During the event, all participants will be connected in listen-only mode during the company's remarks.
After that, we'll start a Q&A session, and questions can be sent via audio by clicking on the Raise Your Hand icon, also found on the bottom part of your Zoom screen. To send text questions, just click on the Q&A icon, also available on your Zoom screen. Before moving on, we'd like to state that forward-looking statements made during this conference call concerning the company's business outlook, and also concerning operating and financial targets, and also to the growth potential of the company, are all based on beliefs and assumptions on the part of the company's management. They are 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, agribusiness conditions, and other operating factors might affect the future development or performance of the companies and lead to results that will differ consistently from those expressing these forward-looking statements. I'd like to turn the floor over to Mr. João Marcelo Dumoncel, who will start the conference. Please, Mr. Dumoncel, you may proceed.
Thank you. Good morning, everyone. It is a pleasure to be here with you this morning, sharing the numbers relative of our Q3 2023. We'll kick off by highlighting something which was very, very important for us in Q3, which was the fact that we reached a record net revenues in the quarter, a historical number for the company, BRL 2.4 billion in revenue in Q3.
In a very strong uptrend, which has been constant in our history, in the history Três Tentos, at least for the past several years, after the IPO, specifically, where we set those guidelines. That record revenue, of course, came from an increase in the volume of products sold. That's important to emphasize that, because markets where we operate, and we're gonna be going into detail as we move forward with the presentation, those markets saw a retraction in unit costs, grains, inputs, and the soybean chain where we operate. We all saw a retraction in costs in the past quarters, in price rather. So that revenue level came from a strong increase in volume, since costs, now prices went down. Also, the expansion of the company, it's worth mentioning our expansion.
We continue to follow on that roadmap towards expansion, both in the state of Rio Grande do Sul and also in the state of Mato Três Tentos has 7 stores planned to be open in 2023, 5 of which are already operational at the end of Q3. That shows our strength, our momentum in expanding our operations. Today, we have 55 stores in Rio Grande do Sul and 7 in Mato Grosso. We have reached the levels that we had planned for the end of the IPO cycle, as we call it, which is the end of 2025. We are delivering those numbers way before plan.
With those seven stores in Mato Grosso, Mato Grosso increases its share in the business, really driving our businesses forward in the input segment, which is where we started, and then the storage areas to receive grains, originating grains... and now with our industry arm. So the whole ecosystem that we work with, which we consider to be the main strength of the company, because one segment can offset the other, right? It's a complementary business and reach a balance, reach a very good level of synergy. This is operational in Mato Grosso already. So the industry is already operating at full steam. The stores, those seven stores that I mentioned already, have crews out in the field. Of course, we're still capturing market share, but everyone is out there in the field making contacts, doing their hard work.
Our receiving units, they are already originating grains by direct origination, via barter for soybeans, for the industrial operations, and also corn in Mato Grosso for trading companies. As I said, already, completing this ecosystem cycle, which is what we do in Rio Grande do Sul already. That's in our DNA, and that's the basis of our thesis for growth. We only think-- we wanted to replicate what we do in the South in Mato Grosso, and so the business in the Midwest tends to become increasingly more relevant, and it's already overcoming our expectations in terms of gaining traction. Next, please. Here are some of the highlights in the financial side. As I mentioned, record revenues in the third quarter.
The year-to-date numbers also at an important level in the first 9 months of the year, which points to an important level of growth in 2023. Positive numbers, positive results. The company has reached that level of growth and has reinforced our thesis. We grow and we deliver results. Quarter-on-quarter, year after year, we have been delivering around those two pillars, growth and results, and that's how we plan to move forward. Next, please. Here, within each of the segments we operate in, as you know, we work with inputs, grains, and industry, and different business segments or different business units, if you will. To shed some light on inputs or ag, agricultural inputs, we had a growth in revenue, which was very slight in the year, very much in line with the growth we had last year.
Of course, this entails a growth in volume to the tune of 30% in ag inputs, especially in pesticides, and over 50% in seeds and fertilizers to be able to balance the drop in prices. So even with this strong growth in volumes, as I said, the drop in prices sort of offsets that growth in volume, but that allows us to maintain a good level of revenues. When you look at the market and the other peers, the competitors, it is a noteworthy performance, very positive. In terms of profitability, of course, this is a sector that still carries some problems from a more challenging market in previous periods. It's not an easy scenario.
The market was impacted by logistic chains, by stock prices, inventory prices, and we are sure Três Tentos is still dwelling in a, in a healthy part, if you will, of the market, with a much better outlook than the rest of the market. But of course, we are not completely isolated, so some impact still comes our way, and that removed a few points in, in the profitability margin this quarter. But we see this as part of a normalizing trend. I think this gives us a pretty good idea of where we're headed. We're trying to shed some light on the inventory levels situation, and that's what we have been working on, that level of inventory. Our gain in market share, our geographical expansion is tied to those numbers.
So as we expand, we gain more market share, and inventory management becomes increasingly important. The same goes for Mato Grosso. The company has worked very hard on sales, and of course, translates into inventory. As I mentioned, the increase in sales, 30, 50, even 60%, depending on the segment, and that led us to average inventory terms, which are historically low or even lower than we were used to. So that is a result of a very efficient inventory management and a very efficient negotiation process with our suppliers and partners who offered good solutions for the price transition moments.
Going back to the other segments, in terms of grains, we see this growth in revenues, especially in the nine months to date, 35% growth in the grains revenue, and a growth in the nine months to now of 60% in gross margins. So the company has been enjoying this volume growth, which is quite important. We have been growing revenues even in a scenario of lower prices, and this product mix has been very beneficial in terms of increasing our gross profit, that and we need that to offset expenses, of course. So the volume of grains grew by 74% year to date, nine months. And in the industry pillar, the last one on the slide, we see a very relevant growth in terms of revenues, especially in Q3.
We can clearly see industry operating in Mato Grosso state, and this will be constant going forward. Those volume increases in Mato Grosso when compared to previous years, and also an increase in revenues. Along the same lines, a drop in prices, but an increase in volume, which offsets price drops and helps revenues grow at the same time. And in this case, an increase in the gross margins, which has recovered as of late. And the industry pillar saw some low profitability periods when we had a failure in the crop here in the Rio Grande do Sul, also coming from the biodiesel policies. All those situations have been overcome today, and the outlook is much more positive now, especially for biodiesel. And we have also recovered margins in Rio Grande do Sul also. Mato Grosso is already witnessing healthy margins.
So again, the outlook is quite positive for the industry arm of the business. Next, please. I'd like to turn it over to Cristiano, our CFO, to shed some light on the EBIT numbers or, and variation that you can see on the slide.
Thank you, João. Now, let's try and check our adjusted EBIT, EBITDA numbers when compared to the previous year and nine months up to date, revenue of BRL 1.7 billion, more than last year, and a CPV, which sat at BRL 1.1 billion above what we had last year. We are now completing these first nine months with a variation in our gross profit of BRL 92 million.
As a complement to that result, which makes up our adjusted EBITDA for the first nine months of the year, we have an effect of our sales expenses, which brings about a point which was very important for the company, which is logistics. That's the main component of that reduction in our margins in the first nine months of the year. In a scenario where we had an increase in the share of grains and industry, which somehow make up margins that are historically lower when compared to ag inputs. Besides that, as we moved towards Mato Grosso, the Midwestern region of Brazil, we saw a relevant increase in the volumes of grains and soybean meals being shipped to ports, starting in the Midwestern. That, of course, entails a logistics cost, which impacted our EBITDA.
So in light of all that scenario, we saw an increase in our logistics costs, which combined with the last with SG&A, which were positive after all, but we have an adjusted EBITDA for 9 months to date of BRL 267.9 million, with a slightly lower margin than what we had last year. It's important to say that the whole year, 2023, is a year that has been atypical, with several factors, which were negative. On the one hand, a drop in prices, as João Marcelo just mentioned, but that we were able to navigate really well, and we continue to work strongly on our ecosystem, replicating our growth models in Mato Grosso.
We are using the same model that we have in Rio Grande, now in Mato Grosso, despite those slight adversities that we had throughout the year. But still, we see ahead of us a couple of challenges, and logistics being one of them. Next slide, please, where we will highlight our efficiency in managing our cash and our debt. I'd like to start by addressing the final number of our net debt, nine months up to date, BRL 116 million in net debt, which is one of the lowest levels of the past quarters, which accounts for our financial health, the healthier in the past months, which also represents 0.19x our EBITDA. How have we gotten to this point where we had a very healthy debt position?
Basically, we have built that position through reducing our needs for working capital, which was more than enough to offset our CapEx. And with our cash and generation, one of the points that should be underlined and emphasized here is that this is a company that has its growth path well drawn, but we also generate the results, and we also generate cash. We had to emphasize that ability that we have, especially amidst an environment where we had several difficulties coming from farmers and the company. Farmers have suffered throughout this period, especially in Rio Grande, with a crop failure, especially for soybeans in the second year in a row. Likewise, we also face a drop in input prices and also several climate issues that have affected our Q3 numbers, including the rainfall, which made it difficult for us to deliver and ship products.
So this combination of facts was faced by the company very successfully, and we were able to generate cash throughout that period. Also worth mentioning, we have other investments there, the acquisition of TentosCap , which includes the portfolio of... the whole portfolio of the company. And that, of course, is made up of net debt and working capital. So in light of this scenario, that's what I had, and I turn the floor back over to Eduardo for him to address Três Tentos day and then wrap up the presentation. Eduardo, over to you. Good morning. It's a pleasure to be here with you once again in our earnings call. First of all, I'd like to thank all the investors who were with us during Três Tentos day, which happened in Mato Grosso.
The first day of the event was a set of presentations, our leadership at the Sinop store, by the most important highway in the Midwest, where we ship all our production from Mato Grosso, BR-163. On the next day, we've had a guided tour to our soy crushing plant and our biodiesel plant, which is located in Vera, the city of Vera, also by the side of the road. It's difficult not to drive by and not see this huge plant by the side of the road. This is the second event that the company puts together after the IPO. This was something we did at home.
We brought the investors to our home to get to know things firsthand, and we had over 70 investors participating, which shows how much we have and how happy we are in welcoming you all in this new plant, in our Sinop store. I'm gonna turn it over to you now to show a bit of how the company has performed throughout the year and the market. We have overcome our expectations when we compare our numbers with the Ibovespa, the São Paulo Stock Exchange numbers. The company closed the quarter with a market value of BRL 6.4 billion. We have reached average daily volume of BRL 13.9 million, also reaching a market value of the number of shareholders, 28,000 shareholders. We simply double that number in the year.
So I'd like to invite you to check our RI website. We have just revamped our website, so please be sure to check it out, our investor relations website. You can monitor our information if you check our website. I turn the floor back over to João Marcelo for his final remarks, and then we can move over to the Q&A session. João, over to you.
Well, everyone, this was an overview of our Q3. When speaking of the company as a whole and our view for 2023, we are very confident in the company. As I've said, we believe in our business model. We believe in the delivery ability we have. We've faced several challenges. We have overcome several challenges. Eduardo just showed our event in Sinop.
So the scheduled schedule we put together at the IPO moment is being met to the letter. Those of you who were there during our day could see that firsthand. We started in a greenfield project. The ramp-up was quite fast. We reached high production levels very efficiently, at a very fast pace, and with excellent performance levels, and that, of course, brings a lot of confidence to the management of the company. The industry arm has brought an increase of 65% in our production capacity, so we moved from a crushing capacity of 4,000 tons to 6,600 tons a day, 4,000 in Rio Grande and 2,600 in Mato Grosso. So we have increased our crushing capacity significantly, and we, in terms of margins for the industry arm, as I said, the expectations are very, very positive.
Biodiesel also operating at a high level, at full steam in Mato Grosso, and this should bring a better perspective in terms of profitability and numbers. In terms of ag inputs, the company is now closing the current cycle. In terms of high prices, high prices that had been diluted in the past quarters, I think this strong sales volume that we have managed to achieve, this gain in market share we've accomplished, of course, they are directly linked to those high volumes, and that has contributed significantly to the positive results. We now have expanded business, offering digital services, and that, of course, gives us more tools, more strength to move forward. We continue to open new stores, and those new stores include, of course, stores with storage units, storage facilities.
So we have a static capacity of 1.6 million tons of grains spread throughout the industries and the stores, which is an important point in terms of logistics, and that's a way that we have to mitigate logistics costs, which is an important challenge we have ahead of us, and we are working hard on it, and we will bring important gains for this segment, providing more profitability to the business. We also have a positive expectation for the crops because of the El Niño, especially in Rio Grande do Sul, which still is our main market. And as I said, we had two years in a row of drought conditions, dry conditions. The coming season is expected to have better rains, better rainfalls. For the field, this has been a positive expectation.
For the coming summer, the expectations are even more positive, both for yields and for consumption of ag inputs. When we have rainy seasons, the input consumption tends to increase as well. So it's looking good, looking positive for the coming crop. So this balance of our ecosystem, we like to mention the ecosystem and the strength of the ecosystem, and in this quarter, this model has proven to be even more efficient. It is, it is through this that Três Tentos becomes strong. We have complementary elements, complementary components that help to offset occasional weak points, and that allows us to continue to deliver positive results, solid results. And Cristiano just showed our healthy numbers just now, which is very important. We are in a scenario of high interest rates, challenging market from the point of view of macroeconomics.
so Três Tentos is in a very safe, very solid position, and with a very positive, very optimistic outlook for the coming quarters. We will certainly continue to be a growth company and a result company. You can count on that, okay? We are now available for questions or comments that you may have. So I turn the floor back over to the operator to start the Q&A session. Over to you. Thank you.
Thank you. We'll now start the Q&A session. Questions can be sent via audio by clicking on the Raise Your Hand icon found on the bottom part of your Zoom screen, and you will be prompted to unmute your mic. You can also send your question in writing by clicking on the Q&A button and writing your question. Let's go to our first question from Ms. Isabella Simonato, sell-side analyst from Bank of America.
Isabella, we will unmute your mic, and you can go on. Please, you may proceed.
Thank you for taking my questions. Can you hear me?
Yes, yes, yes, we can hear you, Isabella.
Thank you. Good morning, everyone. Thank you for taking my questions. My questions are about retail. We saw some important moves in this quarter when we look at profitability and when we look at the expense level. Of course, this is an atypical year, a year where things are becoming to normalize, and of course, you have some distortions because of that. But I'd like to have some color. Looking ahead, looking forward, and assuming there are no more price shocks ahead, what would be the main drivers for the retail margins resuming historical levels? And if you could, give us some color on the timing for that to happen.
We understand there are mix issues, regional issues, product issues, fright or freight issues to be discussed. But when we look at all those components, I'd like to understand or to hear from you, how or what can we expect in terms of margin, recovery and the pace for that recovery? That's the first question. And number two, about SG&A and selling. We saw an important increase this quarter. We understand you're going through a phase where you are expanding, and of course, there is a dilution, ahead, but how can we expect that to go forward? And also in terms of pace, what kind of timing can we expect to see that happen?
Okay, Isabella, I can start, and then Cristiano and Eduardo can complement if they feel the need.
As for the retail question, the main topic for retail still is repercussions from the increase in prices from 2022, where ag inputs went through the roof, and they have gradually come down for the past months, I'd say, now reaching a level that we understand to be more normal, starting in the second half of this year, a few months ago. That's an important thing to say, is that those, the inventories, at Três Tentos did not have relevant inventory of those products, especially fertilizers. We did not have fertilizers inventories, which was the most impacted segment, but we had some inventory for glyphosate and other products at higher prices, and those were diluted, and they were sold in the past months.
So I'd say that as to your question as to what we understand is going to change, that's something we do not expect to impact in Q4, especially for Q4. Inventories will not affect Q4 results, we don't think, or prices, more specifically. We saw a change in mix also in terms of especially pesticides, which within the three segments, seeds, fertilizer, and pesticides, pesticides have the highest margins, right? We had a changing mix. We grew fertilizers, which have lower margins by nature, but that's where we were more competitive, and we were with lower inventories. That allows us to grow volumes more significantly. I'm talking about fertilizers, right? For the seeds market, we saw a change, which is characteristic of the Mato Grosso market, Três Tentos is not a seed producer.
We are resellers of soybean seeds, and that's where the corn seeds market is larger, and that's the market that most impacts the margin mix, if you will. And also somewhat of a delay and a low use of pesticides in the past two years in some Rio Grande because of the drought, and that led to a changing mix. So what do we expect to see going forward now? We have clear actions being put in place, and we're first of all, this final use of our inventories, we expect the mixes to resume with a higher percentage of pesticides or crop protection inputs, especially as we have more rain in Rio Grande, which will demand a higher use of pesticides. And then seeds, soybean seeds also increasing in number, in volume, also in Mato Grosso.
We had our first year selling seeds, now we're going to the second year, where we'll be working our own brands of seeds. So we have important negotiation fronts to explore, to be able to trade our seeds, now in Mato Grosso as well, which brings a positive outlook in terms of resuming profitability. And the idea is to recover margins or resume historical margin levels, or even slightly better, actually, across those segments. We have been investing in specialties year- on- year. Our percentage of specialties have increased. I'm talking about biologicals and micronutrients. Our target for 2024 is to have at least 10% of our volume in pesticides coming from specialty products. So that's a segment that also entails better profitability. So there are several avenues to be explored, and we are confident that margins will recover historical levels, yeah.
The drop we saw this quarter is going to be a one-off, an outlier, if you will. That's not the normal level that we expect to see going forward for that segment. As to your second question, around SG&A, I believe that be a recurring question among analysts. SG&A. Basically, we have freight costs. Cristiano did mention something about that when we break down the adjusted EBITDA numbers. That's our main challenge. Of course, we are aware of that, the main challenge that we saw this quarter, and as a result, it is impacting the quarter significantly. But it is also a front on which we are working hard, and we have several remedies, if you will, to address that.
In terms of the scenario we faced, not Rio Grande do Sul, but Brazil at large, had a record crop, 2022, 2023, large, very large volumes, and that, of course, pressured logistics structure. So prices went up. We had this logistics-specific inflation because of higher demand. The drop in grain prices affected logistics as well, because logistic was even higher because of that, right? Logistics prices came at a higher prices, a drop in grain prices and increase in logistics. In our case, specifically, we had higher volumes, Mato Grosso coming in, increasing grain volumes. We saw an increase in grain and shipped grains. So we had a pressure coming from three fronts, actually. And of course, that has impacted product mixes and within the makeup of our revenue. But that's something we have been working on.
Those are important fronts to be addressed in the coming periods. We're gonna be looking at that very carefully. We know that logistics and freight is decisive for agribusiness as a whole, and we are working hard to address that. Yeah, I'd say we are obsessed in improving our logistics account, our freight account, and we will be able to deliver good results that I am sure will have real, concrete, specific actions being implemented on that front.
Thank you.
Our next question comes from Mr. Henrique Brustolin, sell-side analyst from BTG Pactual. Mr. Henrique, you may proceed.
Good morning, João Marcelo, Cristiano, Eduardo. I have one follow-up on the logistics expense question. João, you said that, well, it does make sense that you have a one-off impact.
It's the first year the company is operating in Mato Grosso at full steam or close to that, in a year where logistics was quite saturated. But if you could help us understand the size of that logistics effect for the 2023 crop, and how much of that can affect the P&L, perhaps a larger gross margin, vis-a-vis a larger logistics cost? And when we think about the business, grains, meal, exports, when you compare Mato Grosso and Rio Grande? What, how do you see EBITDA margin broken down by states? That's for expenses, and also I'd like to explore a bit more the growth topic. You are getting very close to completing your IPO plan.
Few retail stores still to be opened as for, as per the original plan, so I'd like to understand what do you see across those fronts? The opening of new retail stores, the growth in the industry, as you mentioned in the Investors Day, maybe corn ethanol being another possibility, and a growth that you also mentioned just now, verticalizing input, retail, seeds, biologicals, and all those other possibilities. Thank you.
Thank you, Henrique, for your questions. You mentioned freights, right? Without a doubt, in this first year, this first year was a year where we did not have some of the fronts. We had such anticipated purchases of logistics or the exploration of more efficient routes. I'm talking about Mato Grosso, right? In Rio Grande do Sul, we are very efficient. We work hard on railroads.
Both industries have their own train terminals, and that makes our lives a lot easier in terms of competitiveness. But Mato Grosso is still in its first steps in terms of solving logistics issues. That includes, of course, grain storage as well. We are still working to finalize the construction of the storage areas that are only being used partially during this cycle. So for the coming cycle, we expect to have better storage capabilities, larger volumes, and that allows us to have a better pace in terms of logistics, to be able to hire freights in a more timely manner. As I said, anticipated freight contracts, and it can choose more efficient routes, that, of course, brings prices down. I do not expect to see a change in P&L, as you mentioned.
When we look at the reals per ton in gross margins, especially for Mato Grosso, margins are better than margins in Rio Grande do Sul, both for grains and for meal, soybean meal. So this freight expense needs to be offset, and it will be offset, via a higher gross profit, which leads us to an adequate margin in terms of BRLs per ton, and then we can gain efficiency in logistics in Mato Grosso, especially when compared to Rio Grande. That's, how we see it. And what do we have in terms of new fronts Três Tentos is quite sure of our business model, and this quarter is evidence of that. We had a very challenging scenario, the market as a whole. If we look at our numbers for Q3, vis-à-vis the market, we'll see that our numbers are very, very strong, very, very relevant.
It shows the strength that we have, which comes from the combination of those three segments: selling inputs to farmers, strengthening the payment of those inputs by the grains that they produce, different modes of barter and funding, but a lot of cash barter products which are stored in their own storage facilities. That has been one of our strengths, and those grains are shipped efficiently to the industry to crush facilities, adding value at the industry side for oil and biodiesel. Biodiesel going through a very important moment, just as all the other biofuels, it's a growth moment, very good composite outlooks and meal as well, right? The crushing industry is becoming stronger across the world because we have- we are now finding better margins around the crushing operations.
So this balance of our ecosystem and the growth of our model is what makes us very reassured, and that's where we're going to focus going forward. So we will see a growth in stores, of course, not only those predicted by the IPO, but others will come, other plannings will be presented to the market.... And this may include a new industry, sure. If we understand there is a possibility both in soybean crushing and corn crushing. And in terms of verticalization, yes, of course, especially as we try to improve logistics processes and fertilizer chains, seeds, likewise. I think we have, again, especially seeds coming from Mato Grosso. And we are in a position to grow in Mato Grosso, if not directly changing our genetic base.
Once we understand this growth in profitability of the business, this will surely be in our radar. So it's a bit of a combination of all of that, but always focusing on integrating the businesses. The balance we have managed to strike across products with revenues coming from different sources, this will continue to happen. Okay?
Okay, thank you.
Our next question comes from Matheus, sell-side analyst from UBS. You may proceed.
Hello, good morning. Good morning. I'd like to talk about margins also. We've been talking about normalizing margins for the past few quarters.
Looking at the most basic scenario that the company has in the short and midrun, when do you expect to see similar margins to what the company had before, above 25% in imports, 15% in industry, or are those numbers no more attainable given the mix that the company works with now in Mato Grosso? And also in terms of margins still, but now talking about EBITDA margin, the participation of Mato Grosso in this EBITDA margin, it dropped from 8%-10% in the past to 4.5% now, year to date. I'd like to understand how much of that drop in margin, EBITDA margin, comes from Mato Grosso, the ramp-up in Mato Grosso, where we see lower margins. Of course, there is the ramp-up, freight issues that were mentioned.
So that drop in EBITDA margin, how much of that drop from 8%-4% comes from the industry, from the sector? Thank you.
I think we certainly have a scenario now of the industry, which is prevalent, of course. So climate, dropping prices, higher inventory prices. I'm talking about the sector, the industry as a whole, right? So this larger scenario, of course, prevails, if you look from that standpoint. And from that standpoint, our margins are quite healthy when you compare that with the market. Of course, far from what we wish, far from what our focus should be, and we are working on improving that. We have mapped out all those issues quite in detail, and I do believe we're going to recover those margins very, very soon. We will see some improvement in the coming quarter.
We'll see margins going up to better levels in the short run, especially around ag inputs, other segments, but specifically about ag inputs. I do not believe this to be a trend. I think this is actually a momentary crisis, if you will, that the sector is going through. And I, again, I see. I think we are doing better than the rest of the market. In terms of the EBITDA margin, likewise, Mato Grosso coming in, of course, affected our EBITDA margins and the pressure on freights, which I mentioned during my answer to Isabella and to Henrique just now. That pressure comes from that combination of freight costs going up because of higher demands, because of their record crop, grain prices.
Grain prices going down will push freight prices up, and of course, the growth in volume that we saw. And this is just an initial part of the curve. We're still structuring the business in Mato Grosso. We're not being as efficient as we will be and not performing as well as we will, as we mature the business. So I do believe that we will resume better EBITDA levels very soon. It's not by far the level that we want to stabilize around. Of course, in a normal market situation, a normal geopolitical situation would be different, right? But given what we have, those margins need to improve, and they will improve. If I could just complement.
I understand that you have an expectation of seeing the sector improve as a whole, but this hike in prices that we saw in 2021, are they attainable, still attainable by the company? If we resume, things come back to being as they were, do you see those margins coming back? Can we use the past as a good indicator for the future? That's the bottom line question. Cristiano?
Complement the previous question, and then you address this newer question about margins recovery. Matheus, it's important to say when we look at the EBITDA margin or our SG&A as a whole, it is clear that our challenge is the freight situation. And this quarter, it was very different from last quarter, so it catches our attention, and it is a challenge. How can we overcome that?
This will happen through higher intelligence, search for new alternatives, new routes, using the North Arc or the South Arc, and Mato Grosso does offer that challenge. But that's a challenge, you understand, it can be overcome by concrete actions that we seek to bring freight costs down. Still, when you look at the sales expenses, and we have sales expenses without considering freight, we can already see a drop in expenses. We call it SG&A ex freight, not considering freight. Of course, freight is a main challenge, but we are still looking for efficiencies in other areas of the company through better processes, automation, training, internal reorganizations, and so on. So it's worth mentioning that we are looking at the company across the board to try and find efficiencies.
Today, the light is being shed on logistics because that was an important result that caught our attention. But we know that's a challenge that not only the company, but the whole sector is facing, and we're working hard to bring those costs around logistics down. As Henrique and Isabella mentioned, now that we are going through Mato Grosso, we increase our gross margin, but logistics become more expensive, of course. So we need to preserve that gross margin and then, at the same time, reduce freight costs. You are correct. So we are starting the process, as you said, first steps, but this logistics intelligence, this efficiency will come to help us do that. And I don't see that as a moment to change levels in terms of margins, be that overall margins or EBITDA margins.
I think the company is well positioned to recover historical margins and also see the company being able to be even more efficient in SG&A. As we managed to do in other expense items, we're now going to be poring over ways to reduce logistics costs. It is, of course, an important fact, and I give it to João Marcelo to complement your answer, your question. Yes, Matheus, we do not see those levels to be market levels or levels, margin levels that we want. No, we don't. We're gonna go after better margins, just as the whole sector will. We, and we have ways to resume much better levels in terms of EBITDA margins and margins as a whole.
Thank you.
Thank you. Our next question comes from Pedro from XP. You may proceed.
We now move to our next question, and then we'll try Pedro again. Our next question comes from Larissa Pérez , from Itaú. You may proceed. Can you hear me?
Thank you for taking my questions. My question has to do with inputs. In this quarter, the gross margin dropped 370 BPS year-on-year, and you just mentioned that can be explained partly because the inventory effect from pesticides, which were bought at higher prices, and also because of a higher share in corn seeds. Have you analyzed also working with the crushing of corn? We know that corn is more complex than soybean, but it usually has higher margins. So what could drive you to join that market? Then one second question, the year-to-date numbers, we saw a relevant working capital release, which helped reduce the company's net debt.
In this quarter, working capital as a percentage of revenue dropped to low levels. So within this context, I'd like to understand if you could give us some color in projecting a normalized level of working capital moving forward. Of course, it fluctuates throughout the year. We know it is seasonal, but can we say, for example, that when we have a drop in grains and input prices, could we have some accommodation of the working capital as a percentage of revenue? Thank you.
Thank you. I'll address the first question, and then Cristiano will address the working capital question. As for inputs, those 370 basis points that you mentioned, is this the first target we should go after? And as it's been said, it has to do with prices. Corn seeds, yes, I'd say yes, Larissa, but not only corn seeds.
That product mix in which fertilizers have grown at a rate which was higher than pesticides and seeds. Historically, they have more limited gross margins. Corn seeds, yes, that's a growth we have in our radar. That's an item that will gain more relevance as we move forward. Maybe not as relevant as other items because they also grow. But as far as, as for the verticalization, our first focus is to seek to improve soybean seeds, because that's a closer business to us. It's something we already do in Rio Grande do Sul. And from that existing platform in the South, we can extend and replicate volumes in Mato Grosso and provide better results in the Midwest as well.
Not necessarily, requiring more investments in that region, but as we try to optimize the operation in Rio Grande do Sul, right? Perhaps we could work through, working, changing the genetic basis, as we call it, and other vertical operations that can be implemented and can bring a possibility of our having our own seed production to meet that local market. So corn would be, a distant, investment. It's not today, not today, not in our radar so far. Larissa, as to your question about our need for working capital, you did mention prices. Prices is one of the issues, when compared to previous year, but we also have the purchasing dynamics from our growers. They buy gradually, so even if we have a need to have a gradual sale, this will impact, so the working capital will be lower.
But those farmers will buy, that process will resume, the purchasing power will resume throughout the coming months, specifically. So we do not have any expectation that this will be a new, new level of working capital needs. No, this quarter was very positive, no doubt. And other business modes that we do in Mato Grosso, so, forward selling, for example. So all those changes are impacted, barters, delayed, purchases because of the rainfall season. So in a matter of weeks, we see different effects playing out. But we understand that the company is totally equipped to meet the needs, we have in terms of working capital, and we, we have been generating cash to meet that. So at the end of the day, the result of all those combinations of price and other needs, will work out.
We also have the supply side, right? Our suppliers, ongoing negotiations with suppliers, that's also moving forward. So as a whole, we understand that the company had a very strong quarter, and we are now well poised for whatever future challenges may emerge, including new stores, verticalization moves, or a new industry. And that's a moment in which we need to appreciate the fact that the company, in a very challenging year, has finished the first nine months at a net debt level, which is quite healthy, very good leverage capacity. So we are in a very good position to move towards more growth.
Thank you.
Thank you. Our next question comes from Pedro Fonseca from XP. You may proceed. Can you hear me?
Yes. Thank you. Good morning. My first question is about the Rio Grande and the crop situation, Rio Grande.
For the past three years, the state had problems, issues with climate. João just mentioned that the rainfall is above average. So the soil situation, soil moisture content seems to be very good. Is it a good problem, if I may? And along the same lines, is the company comfortable with the capacity to store grains, considering the possibility of having record summer crops? And how will this impact storage turnover? That's the first question. And also, I'd like to go back to the selling side. You have already given an important disclosure. I'd like to understand if we may have had other effects in Q3, and which will be fine-tuned in the company in the coming quarters. So impacts in the third quarter that we wouldn't expect to see in the coming quarters. Thank you.
Okay. As for the climate comment you made, yes, we moved from very dry to very wet, a total inversion of conditions, but that high level of moisture is much better, much easier to be managed than the lack thereof. So that leaves us all very optimistic about the coming crop. Planting is happening right now. We have a good window for planting. We're advancing our planting area significantly now as we speak, and this is an excellent window for Rio Grande, the first few weeks of November, where we have the higher yields. And without a doubt, this brings about a positive perspective, at least to have a normal to large crop. And of course, this will entail logistics pressures, but we understand that we are, once again, well-positioned to face that.
A very good storage capacity, and we have well, well-thought-out logistics plans in place. We have the two main storage units here ready to roll. We also have our railroad terminal to the port. We have units in the middle of the state, which are well positioned in relation to the port. So I'd say even though a larger crop will bring about more pressures, we are certainly well positioned to face those pressures, and we are at an advantage- advantageous position when compared to the comp, the competition, I'd say. As for the margin expenses, we understand that we had some expenses along those lines in the quarter. Those are unpredictable expenses, as you know.
This year in particular, we had above average levels because of this large crop that we harvested in Brazil, across the country, which exerted pressures across all the ports because of higher volumes. So that's an expense we expect to mitigate as we move forward. Of course, being more efficient and also counting on an improvement in terms of hiring and better logistics alternatives. Just as a complement, Pedro, we had episodes of demand, but they are not significant to the point that they could be driving our storage decisions.
Okay?
Okay. I know it can happen, but that's not relevant enough.
Okay. Thank you.
Thank you. Our next question comes from Gabriel from Citi. You may proceed.
Hello, good morning. I'd like to start about capital allocation vis-a-vis the company's current leverage level.
You are in a very comfortable position when compared to the sector average. We've seen several challenging results across the chain. Something that you always mentioned, M&A has always been thought of as an M&A of people, right? As you like to say, but you may have opportunities there. Could we think about that somehow? Or you'd say it doesn't, doesn't make sense for the company to grow via M&A now. Maybe you're thinking about growing organically. And then number two, a quick follow-up on margins. On the industry side, for the past two years, you had soybean challenges in the South. The La Niña effect impacted yields in the South this year. In theory, we should see a recovery in production.
My question is: Do you see an opportunity of improving margins, given that increase in production coming from the South and a higher availability of soybeans coming from your own originating arm?
Number three, about the company's profitability and tax, and tax breaks that you enjoy today, and that helps the bottom line. If you could update us on what to expect going forward with the tax reform, happening in terms of cost, how would that impact the company's effective tax rate, which is actually quite low? What could we expect as a more recurrent scenario? What kind of risks should we monitor? Thank you.
Thank you. Cristiano, would you like to start? I'll start by subsidies. Yes, in our financial numbers, we have explanatory notes, very detailed about the subsidies issue.
We have a work group which is monitoring the law and the act being discussed and voted as for the tax reform. Our estimate of how much of that subsidy we can preserve, and we can use other tools, other alternatives in terms of tax breaks, which are not being used now. Because they are smaller, but they can be used occasionally. So we do have other alternatives, and we do have a work group dedicated to analyzing the tax reform and possible new laws. I sound very choppy. We lost the connection briefly. So from the moment when we have definitions coming from politics, we'll try to find other tax alternatives that will not certainly offset all the effect of the subsidies, should it cease to exist, but they might mitigate those amounts. João, over to you.
Well, as for the leverage level, Gabriel, those low levels that you mentioned, in addition to being a rock, a safety port for the company, they are also an opportunity. We have projects which are ongoing, and M&A, M&A right now, M&A, or a large scale M&A, is not an alternative we are entertaining now, not entertaining now. Of course, every day we see new opportunities emerging. We have our eyes open, but today, organic growth within the existing ecosystem is what we are focusing on. And that's how we see our growth happening, organically. As for margins, you mentioned La Niña, and without a doubt, we have a very positive outlook in terms of an increase in grain volume, especially for soybeans. And that higher offering will tend to favor our industrial operations, of course, in the industry side....
that will certainly bring about a different scenario from the previous years, and it will be an important component for us to increase margins. And I would also add, not only production coming from more and more normalized climate, but as I mentioned before, also the need for inputs that a rainy season brings about. When you have more rain, you need more ag inputs, so that segment will benefit from the climate. We already see volumes growing, and we will see those volumes growing even further in Três Tentos.
This important increase in the number of stores, the sales force, different regions, and in 2 years, they had very difficult 2 years, but now we have finally have a normal year, and we'll have a very positive surprise going forward with those new stores and all that growth as we are operating full steam in a year with a more favorable climate. I'm quite confident about that.
Thank you.
Thank you. This concludes our Q&A session. I'd like to say that the earnings calls for Q3 2023 Três Tentos is now over. The IR department of the company remains available for other questions or comments that you may have. Thank you for your participation, and have a nice day, everyone. Thank you, all. See you next time.