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Edited Transcript of ALICORC1.LM earnings conference call or presentation 6-Aug-19 4:00pm GMT

Q2 2019 Alicorp SAA Earnings Call

na Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Alicorp SAA earnings conference call or presentation Tuesday, August 6, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfredo Luis Miguel Eduardo Perez Gubbins

Alicorp S.A.A. - CEO

* Juan Moreyra Marrou

Alicorp S.A.A. - CFO

* Patricio David Jaramillo Saá

Alicorp S.A.A. - VP of Consumer Goods - Peru Division

* Stefan Stern Uralde

Alicorp S.A.A. - VP of Alicorp Solutions (B2B)

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Conference Call Participants

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* Alonso Acuna Aramburú

Banco BTG Pactual S.A., Research Division - Strategist

* Andres Soto

Santander Investment Securities Inc., Research Division - Head of Andean Research

* Johanna Castro Castro

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Juan José Guzmán Calderón

Scotiabank Global Banking and Markets, Research Division - Associate

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good afternoon, and welcome to Alicorp's conference call. (Operator Instructions) It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and hello, everyone. We are very pleased that you can join us today. From Alicorp, we have Mr. Alfredo Perez, Chief Executive Officer; Mr. Patricio Jaramillo, Vice President, Consumer Goods Peru; Mr. Stefan Stern, Vice President, B2B; and Mr. Juan Moreyra, Chief Financial Officer. Today, they will be discussing the second quarter 2019 results after the press release issued by the company on Wednesday, July 31. If you have not yet received a copy of the earnings report, please visit www.alicorp.com.pe, where there is also a webcast presentation to accompany the discussion during this call. If you need any assistance, please contact i-advize in New York at (212) 406-3693.

Please be advised that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. If you are a member of the media and wish to direct any question to the company, please contact the company directly after the call.

Before we begin, I would like to remind you that forward-looking statements may be made during this conference call and they do not account for economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based on several assumptions and factors that could change, causing actual results to materially differ from the current expectations. Thus, we ask that you refer to the disclaimer located in the earnings release prior to making any investment decision.

It is now my pleasure to turn the call over to Mr. Alfredo Perez, Chief Executive Officer of Alicorp, who will begin the presentation. Alfredo, please go ahead.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [3]

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Thank you, Rafael. Good morning, everyone, and welcome to our second quarter 2019 earnings call. On behalf of Alicorp's management team, I want to thank you for your time as we discuss our performance for the second quarter of 2019.

Let's jump right away to discuss the main highlights of our consolidated quarterly and midyear results. Let's move to Slide #3. We'll begin analyzing our consolidated results. Revenue and volume grew 16% and 23.8%, respectively, versus Q2 2018, mainly driven by the acquisitions of Fino and SAO in Bolivia and Intradevco in Peru. These 3 acquisitions contribute approximately $700 million in incremental revenue per year and will be critical in providing additional momentum to secure growth in the long term.

Organic growth was flat this quarter as our key markets in Latin America faced a continued slowdown. Peru, our largest market, was also affected by weaker-than-expected GDP growth, reduced spending in private and public investments as well as limited job growth in the formal sector, which have been negatively impacting household consumption and consumer spending, 2 critical drivers of Alicorp's business in Peru.

Despite this challenging environment in Peru, our Consumer Goods Peru and B2B businesses grew 2.5% and 0.7% year-over-year, respectively. These figures are even better if you look at volume growth for divisions. In Consumer Goods Peru, we had organic growth for the volume of 3.3%, competing in categories where markets are flat or growing at barely 1% to 2%. We're going to look at these figures in detail further along in the presentation, but I just wanted to point out how Alicorp continues to outperform the market either by taking share from competitors or by expanding into adjacent and new categories via brand management and innovation.

Moving away from Peru, Latin America also remains challenging in terms of growth with Brazil and Argentina showing market contractions, especially within the pasta and personal care categories, respectively, while the Andean countries remain positive. In this environment, our Consumer Goods international division still managed to grow 1% versus 2018. Bolivia is experiencing a modest slowdown in growth as it enters the final stages of the presidential election process. Despite this, Bolivia remains the highest-growing economy in the region.

On the other hand, results from our Central America and Ecuador region showed promising results, helped in part by the recent acquisition of Intradevco.

As for Aquafeed, our shrimp feed, Nicovita, business in Ecuador continues to deliver strong growth. We remain the #1 player in shrimp feed in Ecuador with over 35% share of the market, which, in turn, continues to grow on the back of positive momentum for shrimp volumes. That said, despite a strong performance in shrimp feed, we did have a 4.9% drop in revenue in Aquafeed for the quarter, explained mainly by our salmon feed business in Chile.

This drop is caused by 2 effects. First, as prices for raw materials remained low, we adjusted our pricing accordingly as the salmon feed sector operates under a cost plus pricing scheme.

Second, we did lose some tender contracts in the quarter due to increased competition. Despite these negative effects for the quarter, we remain optimistic on the growth prospects for the salmon feed sector in Chile. Macro trends for salmon remain attractive as we continue to benefit from stable pricing and strong global demand.

Finally, I just want to remind the audience that our midyear results show a growth of 22.3% for the first half versus 2018. And in Alicorp, we have a variety of businesses which are extremely well positioned to take advantage of this growth momentum to create value.

Let's now move to Slide 4 to review our consolidated EBITDA performance. Moving on to profitability, Alicorp's consolidated EBITDA grew 6.3% for the quarter versus 2018, supported by our recent acquisitions in Bolivia and Peru. Gross margins increased 1.5% due to lower cost of raw materials and the impact of our efficiency program. As we discussed before in our Q1 earnings call, soft commodities, especially oilseeds components and palm oil, are running at the low end of the cycle as a result mostly of global trade tension between the U.S. and China. These soft commodities continued trading lower as low inventories continued to increase, adding additional doubling pressure for the wheat and soybean-based product portfolio. Nevertheless, this is an environment that we at Alicorp have experienced before and have a proven track record in executing various strategies to defend and even increase our profitability levels.

Organic EBITDA grew 2.3% versus 2018, underpinned by the strong performance of our Peru businesses in Consumer Goods and B2B and our shrimp feed platform in Ecuador. In CGP and B2B, we managed to defend profitability in most of the categories we compete, offsetting the current tiering down effect by gaining market share and launching new products. As such, organic EBITDA margin was 14.8% for the quarter, 0.4 percentage points higher than that of 2018.

Excluding our Crushing unit, our consolidated EBITDA margin, organic and M&A, reached 14.3% during the quarter, an increase of 0.3 percentage points year-over-year. This increase proves that we are in the right track in terms of extracting profitability from both our legacy businesses as well as the new acquisitions.

That said, let me address our recent results for Crushing. The Crushing business is having a very rough year with crush margins for soybeans averaging $25 to $27 per ton for the year versus over 40% -- $40 per ton level that we envisaged at the beginning of the year as a result of very low prices for the soy complex commodities. My team will later comment on the actions taken to boost profitability for our Crushing business in this low commodity cycle environment, but we wanted to let you know that we have a plan to both increase profitability and reduce volatility in this business.

Finally, as for the first half results, our total EBITDA grew 9.5% versus 2018, providing a healthy base for future profitability on the back of our new efficiency version 2.0 and synergy from our recent acquisitions, which we will explain later.

Let's move to Slide 5 so I can provide an update on our efficiency program. As you can see in the first graph, since the beginning of Alicorp's efficiency program, our constant focus on gross profit, revenue management and the SG&A fronts have allowed us to reduce by 4.7% the efficiency ratio measured as total costs excluding commodity and SG&A expenses divided by net revenues. Even though we have been improving these KPIs over the last years, investments in new capabilities, digital transformation and IT programs among others have slowed down the reduction of the ratio in 2019, which is planned for and therefore expected. Our strategy is to generate efficiencies and then invest a part of them into new margin initiatives and capabilities to boost future growth profitability and therefore, generate more value to shareholders.

In the graph to the right, we can appreciate the efficiency ratio breakdown in 3 fronts: industrial, food market and administrative. As you can see, since 2016, we have been reducing as a percentage of sales both the industrial and go-to-market ratios with CAGRs of minus 7.1% and minus 0.9%, respectively, thanks to our efforts in the efficiency initiative mentioned in the previous section.

Regarding the administrative subratio, we can see a slight increase below inflation due to the reinvestment in new capabilities that we mentioned above: First, digital transformation by the development of a digital platform in order to become more data-driven in all of our businesses. It's important to highlight that we created in 2017 our revenue management center of excellence.

Second, innovation center of excellence by the investment in H2, horizon 2, or next-to-core market, and horizon 3 or new markets to achieve long-term growth.

Third, IT investments by -- with the implementation of our new ERP system, the SAP 4HANA, to adopt the latest technology to the entire company.

Fourth, investing in new talent by the creation of [ELA], a new leadership school as part of a new capability development program.

And fifth, other new capabilities, which include the creation of an Integration Management Office, the IMO, and the consolidation of the commodities and corporate affairs and sustainability strategy by (inaudible).

But to give you some insight about Alicorp's sustainability strategy. Alicorp is generating a positive impact across every step of its value chain by protecting the environment and promoting social wellness from a holistic perspective. With respect to the latter, the company has developed strategic alliances with the public sector to implement 2 high-impact programs: The first one, RevelArte, together with the Ministry of Education and D1, to develop social-emotional skills in over 4,000 school teenagers via artistic expression and using this model to incorporate it as part of a national educational system.

And second, an integral strategy to fight anemia in Peru and reach more than 500,000 people through 2 key directives among others. The first one is called (inaudible), an alliance with the Ministry of Health, that executes through food trucks that promote high iron content in food preparation and displays various accessible dietary options. Another program is called (inaudible), a powerful 6-month communication campaign to raise awareness of the problem.

To deploy our efficiency action, we're defining the scope of what we call the efficiency 2.0 as well as key initiatives road map for the following 3 to 5 years in which we expect to reinforce capabilities in the fronts mentioned above and to develop new ones in both the capital expenditure and working capital fronts. We have high expectations as to the potential impact that this efficiency 2.0 will have on profitability and value creation.

Let's move on to the next section to discuss the operating results from our various businesses. Along with the results, my team will provide an update on the current macro situations and sector dynamics. Let me pass you over to Patricio Jaramillo, our VP for Consumer Goods Peru, to discuss Slide 7.

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Patricio David Jaramillo Saá, Alicorp S.A.A. - VP of Consumer Goods - Peru Division [4]

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Thank you, Alfredo. 2019 is proving to be a challenging year for Consumer Goods Peru. We started the year with a GDP growth expectation of 4.2%. And since then, it has been constantly revised down. During the first half of this year, GDP grew only 1.7%, and it's expected to end the year at 3.2%.

Moreover, a sustained decline in the employment rate over 2019 triggered a reduction in consumer confidence that led to a slowdown in consumer spending on some categories. If we take a look at the market growth for Alicorp's category baskets as measured by Kantar for both branded foods as well as Home & Personal Care products, it merely grew 0.8% in volume year-to-date versus 2018.

Despite this tough macroeconomic and market environment, Alicorp managed to deliver first half organic volume growth of 3.9% and 27.3% if we include Intradevco's acquisition. Organic revenue also grew 3.5% and 21.4% with the acquisition. Growth came from 2 sources: One, gains in market shares in key categories; and two, expansion into new and adjacent categories based on our Megabrands strategy deployed in 2014.

Let me provide some insight on several actions that we have undertaken to offset market slowdown and overcome our key competitors. In pasta, where volume growth is coming from low-end platform's open market, we repositioned our Nicolini brand within the Tier 3 segment to go head-on against value players. Given its superior performance versus its competitors, it quickly managed to capture 2.2 points of additional share. We have extended the Nicolini brand to Sauces and Edible Oils also during this quarter.

In bleach, which is a new category for us that came with the Intradevco acquisition, we have captured 1.5 points of incremental share by including our new value megabrand, Sapolio, within our network of exclusive distributors. Also since the acquisition, we have expanded brands such as Dento and Aval in toothpaste and liquid soap, respectively, among these distributors.

Our Megabrands strategy is key to accelerating growth in market share. Recent examples of the continued power of this initiative is: One, the sustained success of canned tuna under our Primor brand, where we had gained market leadership 2 years after our introduction; two, growth against all pricing tiers for our Opal stain remover initiative; and third, growth with the recent launch of our Opal Sports variety in powder detergents, which we are now extending to liquid during this month.

Let's move on to Slide 8, where we're going to talk about innovation and how it is a critical driver for growth. One of the levers we are using to deliver superior growth and returns is innovation. For the past years, our Consumer Goods Peru business has launched and revamped more than 40 to 45 products per year. Thanks to our focus both in product and market development, we have been able to launch new product and line extensions both in branded foods as well as in Home & Personal Care, which resulted in growing at higher rates than the markets where we compete. For instance, during the 2014 to 2017 period, while the Peruvian market was shrinking in volume terms, we managed to deliver superior growth with a compound average growth of 3.2%.

It is important to highlight that in the past, our investment in innovation was mainly focused in categories for our core horizon 1 and next-to-core horizon 2 markets. Since 2018, we have been beginning to invest heavily in horizon 3, or new markets, which will allow us to enter higher value-added categories. This year, we're aiming on doubling our innovation budget. Our horizon 3 investment in innovation this year should be between $3 million to $4 million, which equates to 1.7% to 2% of our Consumer Goods Peru legacy business without Intradevco.

Digital continues to be at the center of our commercial project development as well. We are advancing in the implementation of analytics to accelerate sales in traditional trade, accelerating on the deployment of our e-commerce and CRM platform with Ali and running final testing on our transportation system optimizer in our direct distribution model.

Let's now move to Slide 9 to provide an update on the integration of Intradevco's acquisition. Picking up from our first quarter 2019 conference call, we continue to advance according to schedule in our integration plan and remain on track capturing synergies through our IMO team. For the second quarter of 2019, we maintained an estimated value of synergies in the range of $120 million to $160 million, which represents a $40 million increase in net present value versus our business case and an EBITDA run-rate contribution of $12 million to $16 million in 2024. As of June 2019, we have captured $1.5 million in commercial and operational synergies and expect to close this year within our suggested EBITDA range of $2.5 million to $3.5 million. At the same time, we expect a positive cash flow generation of $2.5 million to $3.5 million from our synergies and working capital initiatives.

The required implementation, restructuring cost and investments required to fulfill our business plan have been offset by the synergies identified. These synergies come from various fronts such as: One, commercial and marketing; two, operations; three, administrative and financial optimization; and four, other value creation opportunities.

Let's dive into these initiatives. In the commercial and marketing front, we have been working diligently in the optimization of Intradevco's distribution through our exclusive distributor model, consolidating as much as 10% of Intradevco's selling volume in categories that fit within our distribution channels and incrementing market share in 4 out of 6 main categories in the first 2 bimesters of 2019. Also, we leveraged on Alicorp's commercial conditions to build synergies by adjusting sales and promotional costs in the traditional and modern trade channels. Finally, we have been working to integrate marketing teams and processes. One of the results of this integration was the launch of our first marketing campaign under the Dento brand focusing on building brand recognition and highlighting product attributes. We continue to exploit commercial synergies and expect to generate an additional EBITDA in the range of $6.0 million to $8.0 million.

Second, our operations front. We have placed a strong emphasis in the amalgamation of industrial standards and have started implementing a series of initiatives targeting plant efficiencies, labor and security and sustainability. Daily measurements of key industrial KPIs are gradually being implemented in the operation, focusing on cost control, fulfillment of productive plans and line efficiency. As for security, we recently launched a new corporate security format in Intradevco, which will allow us to report and investigate on-site accidents, implement operational best practices and develop security training programs for our employees. Also, we have started capitalizing on manufacturing and logistics synergies through the optimization of our supply chain network, new cost efficiencies in our design-to-value portfolio strategy and cost reductions in raw materials through our improved purchasing conditions. As of June 2019, we have captured approximately $300,000 in operational synergies by using new economies of scale to improve commercial contract. As for our 2024 run rate EBITDA target, we expect to have additional annual EBITDA in the range of $3.5 million to $4.5 million from synergies.

Third, administrative and financial. In June, we kicked off [Project Genesis], an important milestone in the integration of SAP platform and processes in Intradevco. This corporate effort will implement the ERP system across all business units and to standardize process aligned with our long-term strategy. Project Genesis will go live in the fourth quarter of 2019, and we are certain that this integration will help us build on future synergies and prepare us for the implementation of SAP S/4HANA in the near future.

Additionally, we continue to improve cash flow generation on the back of working capital optimization initiatives and better funding conditions. This will allow us to generate an additional EBITDA of $0.5 million to $1 million annually.

Finally, regarding other value creation opportunities, we are currently focused on consolidating our client base in Latin America and strengthening Intradevco's presence in the region by operating a new and robust Home & Personal Care product mix and entering new markets such as Mexico. As for our B2B business, we are evaluating incremental value levers with our go-to-market structure and exploring portfolio development for new and existing business segments. These initiatives will allow us to generate an additional -- an annual incremental EBITDA in the range of $2 million to $2.5 million.

Let's now move on to Slide 10, where we are going to take a look at Consumer Goods Peru second quarter performance. Reported revenue and volume from Consumer Goods Peru business grew 22.1% year-over-year and 30.5% year-over-year, respectively, reaching PEN 828 million and 181,000 tons. The impact of Intradevco's acquisition mainly explains these double-digit increases.

Organically, revenue and volume grew 2.5%and 3.3%, respectively. In terms of revenue growth, the main contributors were the following categories: One, the canned tuna category increasing 58.4% year-over-year due to the solid momentum and the ongoing market share capture with Primor; two, the Sauces category growing 12.5%, explained by the introduction and innovation strategy under the Nicolini brand; third, the pasta category increasing 3.9% year-over-year, supported by the development of our differentiated strategy also for the Nicolini brand; and fourth, the laundry detergents growing 1.9% as a result of a tiering up trend and the positive impact of commercial and marketing strategies for our Opal and Bolivar brands.

Regarding profitability, reported gross profit increased 18.8% year-over-year, while gross margin decreased 1 percentage point year-over-year reaching 34.9%. Excluding Intradevco's acquisition, gross margin was 36%, up 0.2 percentage points versus the second quarter 2018 due to our revenue mix with a higher contribution from value products offset with lower raw material prices and cost savings generated through reformulations and design-to-value initiatives.

Reported EBITDA amounted to PEN 157 million with an EBITDA margin of 18.9%. Excluding the impact of Intradevco's acquisition, EBITDA would have been PEN 139 million with an EBITDA margin of 20.1%, flat when compared to the second quarter 2018.

Now let me pass the floor over to Stefan Stern, our VP for B2B, to discuss Slide 11.

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Stefan Stern Uralde, Alicorp S.A.A. - VP of Alicorp Solutions (B2B) [5]

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Thank you, Patricio. B2B is experiencing a similar macro scenario than that of our Consumer Goods Peru business. That said, it is important to point out that top line growth and overall profitability for B2B is highly correlated to the growth in restaurant spending, also known as restaurant GDP. Restaurant GDP growth regained momentum after a significant slowdown in 2017 through the effect of the El Niño phenomenon. However, since the beginning of 2019, we have seen a pullback in all segments of the restaurant business. The general slowdown in the economy and the formal employment growth indicators are directly affecting consumer spending, which, in turn, negatively impacts both the frequency and average ticket of eating out.

The current cycle of low commodity prices explains substantial downward pressure on the top line for all of our business platforms. In this scenario, our multi-tier strategy has been to defend and scale without leaving space for competitors to regain market share. We have a variety of brands for both our Food Service and bakery platforms that allows us to compete against low-end and value players without destroying our brand equity.

Our pricing efforts and efficiency initiatives in the overall value chain have been a key component of our successful profitability results. A good example of this strategy can be observed within our Food Service unit, which is our most profitable business, where we continue to be dominant market leaders while increasing profitability.

Now let's move on to Slide 12. In B2B, reported revenue reached PEN 399 million, was basically flat against last year. The main revenue growth contributors were Food Service platform and the Industrial Clients platform growing 2.6% and 3.6%, respectively, year-over-year. Countrywide, bakery registered revenue decrease of 2.2% against last year as a result of industrial's flour revenue decline due to the pricing strategy applied in order to reflect the cost of all wheat varieties. Although the second quarter had a decline in revenue for industrial flours, for the first half, we are 1 percentage above in revenue and expect the second half to regain momentum. It is worth mentioning that industrial flour revenue decrease was partially offset by the increase in margins by 12% as a result of the positive impact of marketing activity directed towards the pastry baking segment.

Regarding B2B profitability. Gross profit reached PEN 85 million, increasing 12.6%; while gross margin increased by 2.2 percentage points reaching 21.3% as we were able to: One, control the tiering down effect in oils and flours with a robust pricing and revenue management strategy; two, capitalize the lower raw material cost in crude bean oils and derivatives; and the capture of savings as part of our efficiency program. EBITDA reached PEN 52 million, increasing 13.4% year-over-year; while EBITDA margin totaled 13.1%, increasing 1.5 percentage points, explained by the higher gross margin partially offset by higher hedging expenses as a result of the increased volatility of international wheat prices.

Now let me leave you with our CFO, Juan Moreyra, to discuss the performance of the rest of our business units.

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Juan Moreyra Marrou, Alicorp S.A.A. - CFO [6]

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Thanks, Stefan. Let's move to Slide 13, Consumer Goods international Q2 2019 performance. Let me give you a quick snapshot of our Consumer Goods international business. Reported revenue amounted PEN 439 million, while volume reached 99,000 tons, growing 40.2% and 23 -- sorry, 27.3% year-over-year, respectively, mainly explained by the acquisitions of Fino, SAO and Intradevco, which contributed PEN 185 million in revenue terms.

Excluding the impact of acquisitions and IAS 29, revenue increased 1% year-over-year to PEN 237 million. This increase was explained by the recovery of Ecuador and Argentina operations.

Deep diving into Consumer Goods Ecuador, revenue in U.S. dollars grew 82% year-over-year driven mostly by Intradevco's acquisition. As for Argentina, volume grew 8% year-over-year behind market share capture in our core competitors -- sorry, core categories, hair care and laundry, leveraged in our strong brands, Plusbelle and Zorro, coupled with price adjustments.

On the other hand, Consumer Goods international grow -- the revenue growth was offset by lower performance in Brazil due to the strong contraction of pasta market in Area II and changes in our brand mix and chow mix.

Regarding Consumer Goods international profitability and excluding the impact of acquisitions and IAS 29, gross margin was 30%, increasing 0.2 percentage points year-over-year. As for second quarter 2019, EBITDA amounted to PEN 23 million, an increase of 34% year-over-year, mostly explained by the acquisition of Fino, SAO and Intradevco.

Year-to-date, revenue increased 48% year-over-year to 83 -- sorry, PEN 833 million, while year-to-date EBITDA increased 3.3x year-over-year mainly explained by the acquisitions of Fino and SAO and Intradevco, which contributed to -- PEN 370 million and PEN 37 million in revenue and EBITDA terms, respectively. The year-to-date EBITDA margin increased from 2.1% to 4.7%.

Let's move on to Slide 14, Bolivia update on market dynamics. As we mentioned earlier, GDP growth in Bolivia has been revised downward on softer macro environment and flattish growth for consumer spending. The markets for both branded food and Home & Personal Care products have contracted with key categories such as Edible Oils and pasta contracting 2% and 3%, respectively, and laundry detergents shrinking by 7%. In addition, there is an ongoing tiering down effect.

Despite this environment, we achieved all-time high levels of market shares of 17% and 50% for laundry detergents and Edible Oils, respectively. In laundry detergents, the addition of Intradevco's portfolio, which focused on Tier 3 and Tier 4 segments, allows us to replicate our Peruvian multifront strategy in the Bolivian market. We have increased market share by increasing our client coverage for the Intradevco products. Nevertheless, we managed to protect profitability by changing the channel mix strategy, increasing our presence in the modern channel as well as Food Service and bakeries.

Let's move on to Slide 15 to talk about the second quarter 2019 performance. Reported revenue reached $42 million in the second quarter of 2019, which represents 2x the revenue figure of the quarter #2 of 2018, mostly explained by the acquisition of Fino, SAO and Intradevco. It is important to highlight that the second quarter 2018 figures include partially financial results of Fino and SAO acquired in May and July of 2018, respectively, but do not include Intradevco financial results acquired in January of 2019. The main contributors of growth were shortenings, laundry detergents and Edible Oils for consumer goods and Bulk Oils for B2B. Laundry platform continued being more relevant in the total product portfolio as a result of [abrupt] consolidation and a multitier strategy with the Bolivar brand in the premium segments, the one -- the UNO brand in the mainstream and the Patito brand in the value segment.

In terms of profitability, gross profit amounted $12 million in the second quarter of 2019, accounting for over 1.9x quarter 2 of 2018 figures with a gross margin of 28% compared to the 29.8% for the second quarter of 2018. The lower margin compared to the one from the last year is mainly explained through a revenue mix effect that now includes the lower margin of the acquired businesses as a result of a higher contribution of the Edible Oils segment that has lower margins than the home care segment.

Finally, EBITDA for the [first quarter of 2018] reached $4 million, which represents a 40% increase when compared to the result of the second quarter of 2018 with an EBITDA margin of 9.7%.

Year-to-date, revenue increased 3.5x to $83 million while EBITDA increased 3.3x to $10 million with an EBITDA margin of 12.4%, mainly explained by the acquisitions of Fino and SAO.

Let's move on to Slide 16, integration of Fino and SAO acquisitions. We are in a consolidation phase with a run rate EBITDA between $17 million and $20 million, an additional of $3 million to the lower limits of the range announced in previous calls.

Let's refresh the initiatives of each front. In the sales and marketing front, first, we plan to develop our B2B business in Bolivia focused on the Food Service platform through the consolidation of our Bulk Oils [category] and portfolio expansion.

Two, we continue to the -- with the development of our home care platform. Let me give you an update of the results and activities made during the first half of this year to accomplish this initiative. In our Detergents category, we have gained over 1 percentage point of market share compared to 2018. This includes continued momentum in our Bolivar premium brand as well as a rematch of our UNO Tier 3 brand with a new product, new design and a more competitive price point. Nowadays, the lower tier in Bolivia represents 29% of the market, an increase of 9% compared to 2018 given the [tiering] down dynamic.

Three, in order to consolidate our hair category, we relaunched our Plusbelle brand with a new image highlighting ingredients used. In the pasta category, we plan to develop a market segment focused on nutrition.

Fourth, we continue with our plan to implement commercial projects in order to increase revenues. During the second quarter, the local team worked with our digital team in the development of an application for the implementation of suggested order. We have also started a client segmentation project in June with good results so far.

In the supply chain front, we see important reductions in transportation costs, logistics and procurement optimization and raw material standardization. We have reduced our logistics costs for the export of commodities in the $500,000 for the second quarter of 2019 due to a better negotiation of Fino and SAO combined. We implemented also the sales and operations planning process, giving us better visibility into demand, production capacity and inventory. We expect a reduction of operating costs and reduction of required inventory.

Within the Crushing business, we expect an increase in sunflowers and soybean meal sales in Peru with the integration of Romero (inaudible) with our B2B platform, which allows consolidating the portfolio of clients across both businesses. We also are leveraging on the expertise of our corporate team, applying hedging strategies to reduce risk in commodity prices. Consolidated order volume needed for Alicorp to generate economies of scale and generate efficiencies in (inaudible). And finally, with this Crushing business, grow our agro input services.

Finally, over the administrative and financial front, one, we -- as announced in previous calls, I'm glad to share with you the successful merger of Fino and SAO in April. As a result of the integration of these 2 legal entities, we are already seeing better coordination and efficiencies, which will facilitate to continue capturing the identified synergies and value creation opportunities.

Second, IT (inaudible) with the successful SaaS implementation in order to improve connectivity, standardize processes and be prepared for the implementation of SAP 4HANA in the following years.

Third, we expect the lower administration -- sorry, we expect to lower administration cost per capita by business function optimization and continue optimizing the debt structure and financial expenses.

Now let's move on to Slide 17, Aquafeed update on market dynamics. As you know, shrimp feed and salmon feed operate in different market dynamics. First, let me comment on the current market environment for shrimp feed. Our largest market, Ecuador, continues to show strong market momentum with a 26% year-over-year growth on exports, explained by 2 factors: Number one, steady demand from Asia; and number two, increased sophistication within the industry via use of technology tools, which enable an increase in harvested yields.

Moving on to Central America. A high volatility environment in shrimp export ask for farmers to explore new geographies to improve margins and search for better credit conditions. These changes have forced Alicorp to optimize its client base to reduce trade risk.

In terms of pricing, international shrimp prices remain flat around $4 per pound, while macro ingredients such as soybean meal and fish meal trended downwards, having a positive impact on margins.

In terms of market share, our Nicovita shrimp feed business remains an undisputed market leader in Ecuador with approximately 35% volume share.

In Central America, our production facility in Honduras continues to consolidate production for the region since the third quarter of 2018 and will help us spearhead our commercial efforts into the region. As for Mexico, our road map for growth involved boosting our technical assistance, increasing our footprint in new divisions such as (inaudible) and improving our delivery service capabilities.

Let's move on to salmon feed and its current sector dynamics. Global use for salmon producers has increased 7% year-to-date, while international prices remained relatively flattish but is profitable -- but at profitable levels. We expect salmon prices to hold between $5 to $5.5 per pound per year.

In Chile, the current consolidation trends between salmon producers as well as our vertical integration between salmon farmers and feed vendors is already having a negative impact in the size of the total potential market for salmon food. Nevertheless, our recent planned capacity expansions, along with our newly developed salmon research and R&D capabilities, should allow salmon food to remain profitable in the long term, by securing new clients via production of high energy diet, which are highly demanded by salmon farmers.

Let's move on to Slide 18, Aquafeed, to talk about the second quarter performance for 2019. Regarding Q2 2019 pro forma results, reported revenue reached PEN 548 million, down 4.9% year-over-year. And volume amounted to 156,000 tons, down 1.9% year-over-year. The Aquafeed business had mixed results in different platforms and geographies where it has presence. On the positive side, we had a healthy performance on the shrimp platform in Ecuador growing 3.2% year-over-year on the back of the strong demand of the Ecuadorian shrimp market. And on the negative side in Chile, we made some tenders contract, which we expect to partially recover in the second half of 2019. And also we had lower revenue per ton associated with the decrease in raw material costs.

And in Nicaragua and Panama, we had a tougher competitive environment with some portfolio optimization, which, in the positive side, is optimizing the trade risk profile in our client portfolio.

Regarding profitability, gross margin increased 2.7 percentage points due to lower raw material prices, mainly soybean and fish meal, partially offset by the ongoing tiering down in the shrimp business affecting our portfolio mix.

EBITDA reached PEN 85 million while EBITDA margin was 15.4%, increasing 1.9 percentage points mainly due to the higher gross margin.

Year-to-date revenue grew 2.1% to PEN 1 billion. However, EBITDA increased almost 1% to PEN 142 million due to higher gross margins as a result of lower raw material prices and the positive impact of the efficiency product.

Let's move on to Slide 19, Crushing update on market dynamics. As we have mentioned before in prior earning calls, our Crushing operation in Bolivia is a highly cyclical business that depends not only from lower commodity markets, especially soybean meal -- soybean oil prices but also from domestic drivers in Bolivia such as the macro local industries and local supply of soybean resulting from planted area and the average yield per acre. A good measure of profitability within the Crushing industry are crush margins for soybean and sunflower, which act as proxies for gross margins.

That said, let me provide you with some color on these drivers. Global soybean [complete] prices are currently at their 10-year lows on the back of the current trade war between the U.S. and China, which, in turn, results in lower demand for soybean purchased from China. In addition, global inventories for soybean complete grains remain at record high.

Finally, the effects of recent swine flu epidemic in China have significantly reduced consumption of soybean-based animal feeds. On the domestic front, one critical factor pushing soybean and sunflower prices down is the current excess capacity within the Bolivian crushers, which is around 73%. It is important to highlight that there is a natural hedge between our consumer goods B2B and agriculture platform and our Crushing business. More than 66% of our crushing business out of soybean [complex] goes into our internal units, with third-party clients under long-term contracts purchasing the remaining third. That said, we are actively working on reducing price volatility by securing crush volumes both for internal consumption as well as for third-party clients. Currently, approximately 60% of soybean meal output is secured as it flows to the Aquafeed operation in Ecuador and to our meal distribution business, which, in turn, sells to poultry farmers in Peru.

In terms of soybean oil, 35% of our volume is used as raw material by our Consumer Goods operation, with the remaining volume being sold to third-party clients.

Let's move on to Slide 20 to talk about the performance of the Crushing business for the second quarter. Let's briefly discuss the performance of our Crushing business for the quarter. Total revenue amounted to $74 million, an increase of 57% year-over-year. This growth was explained by higher volume of oilseeds procured for the summer soybean campaign, which began on April and ended in May. Despite an increase in oilseed volume [surge] and in light of the negative market dynamics previously discussed, profitability for the business was down. Gross margin for the quarter decreased 1.8 percentage points from 1.2% to a negative 0.6%, resulting in a near negative figure. Consequently, EBITDA results were also negative, amounting to a loss of $7 million for the quarter.

Despite this environment, we're actively working on various levers to increase profitability for the business in this low-price commodity environment. Among these initiatives are, number one, agro solutions, which involve offering our (inaudible) storage capacity to several producers as well as to helping them in lock-in prices in international markets; two, byproduct solutions, which involve commercial alliances with the poultry industry; and three, efficiencies in logistics, by generating economies of scale via consolidation of shipments with our regional players.

Finally, let me circle back to Alfredo for an update within our financial guidance for 2019.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [7]

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Thank you, Juan. Let's move on to Slide 22 on revenue guidance. Overall, we're maintaining our consolidated revenue growth guidance from 2019 of 20% to 24%. However, we're downgrading our revenue growth guidance, excluding Crushing business, from 19.5% to 21.5% to 18% to 20% in light of revised [role] in the salmon feed unit of our Aquaculture business given the volume loss in salmon feed during the first half of the year. Growth expectations for Brazil are also downgraded as the market contracted significantly more than expected. On a more positive note, we are expecting higher top line growth from our international front in Bolivia, Southern Cone and Ec -- and CAM-Ec units. Growth of our Peru Consumer Goods and B2B business remains unchanged on the back of our strong performance in the Home & Personal Care food platforms.

Let's move on to Slide 23, profitability guidance. For EBITDA margins, we're maintaining both our consolidated guidance as well as our EBITDA margin, excluding Crushing, ranging from 12.5% to 14% and 13% to 14.5%, respectively. That said, we are making some adjustments into the different businesses, reducing expected profitability for the year on our: a, Brazil; b, Southern Cone; and c, Crushing businesses. On the other hand, we're upgrading margin expectations on the following businesses: Bolivia, CAM-Ec and Aquafeed, EBITDA guidance due to positive momentum for our Fino, SAO and Intradevco acquisitions.

Let's move on to Slide 24 for the consolidated guidance. First, our consolidated revenue growth remains unchanged from 20% to 24%. Consolidated EBITDA margin expected to all hold between 12.5% to 14.5%. And even though we had some headwinds during the first semester, we feel confident of achieving this goal on the back of positive momentum for consumer goods, B2B and shrimp feed units as well as the ramp-up of synergies from our Bolivia and Intradevco acquisitions. For net income margin, guidance remains at the rate between 5% to 7%. Net margin includes the lower-margin Crushing business.

In terms of ROIC, we're reducing our estimates to a range of 10% to 12% in light of significant drop in profitability over the Crushing business, along with a highly volatile [limbo] macro scenario for Peru. Lower ROIC [merely] explain that low-margin Crushing business. Excluding the Crushing business, our expected ROIC range should be between 11% and 13%. And just as a reminder, our ROIC has been recalibrated following the acquisitions in Bolivia and Peru, which include all goodwill generated.

We're maintaining our expected net debt-EBITDA range from 2.5x to 2.7x, considering the sale of our BAP shares. Moreover, adjusted net debt-normalized EBITDA remains at the same expected range, 2.3x to 2.5x at year-end. This ratio excludes Crushing business working capital related to debt and normalized through the cycle EBITDA generation. Expected EPS remains unchanged between PEN 0.6 to PEN 0.85 per share. And finally, we're maintaining our CapEx target range for this year between PEN 330 million to PEN 380 million, which also includes the CapEx requirement of our recent acquisitions.

Finally, let me pass over to Stefan as he will provide a brief strategic update on the B2B business.

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Stefan Stern Uralde, Alicorp S.A.A. - VP of Alicorp Solutions (B2B) [8]

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Thanks, Alfredo. Let's move on to Slide 26. The B2B business is highly strategic for Alicorp as it provides scale and profitability with great complementarity with EGP business in Peru. It represents 19% of revenues and 17% of EBITDA.

Our 4 platforms are well organized to cater to very specific sets of customers. In that sense, we have developed tailor-made products for the needs of each one of the segments we reach. In doing so, we have gained leadership in each of the categories in which we compete. In the recent years, our Food Service platform has shown a more dynamic growth as we continue to see a change in the consumption of [out of home] and group. We have been strengthening our value proposition and portfolio accordingly. In doing so, we have managed to grow above-restaurant GDP, gaining market share. With 21% of total volume, it represent 37% of revenue and 51% of EBITDA. These figures encourage us to accelerate the growth of this platform.

Now let's move on to Slide 27. Three years ago, we changed the name of our business unit to Alicorp Soluciones or Alicorp Solutions. We did this to reflect our conviction of making sure we provide our customers with much more than just products or ingredients. We have developed a unique B2B model that delivers a robust value proposition based on 3 main competitive advantages: one, a highly efficient go to market; two, a brand model that allows managing value by segments; and three, a robust manufacturing and distribution capacity.

Regarding our go-to-market, we have a complex segmentation model with 25 different segments that delivers specific solutions to each one of them. We understand that the rotisserie chicken restaurants has very different needs than a bakeshop or a fish cannery. Understanding our customer needs has given us deep insights that differentiate us from our competitors, not only in the go-to-market but also in the product innovation. We have the widest direct customer reach in the industry with 25,000 customers out of a universe of 75,000 customers.

Our brand model leverages on many of the legacy brands of Alicorp but has also built new ones specifically for B2B. In the last 4 years, we have developed a strong multi-tier brand strategy with distinct value propositions. In addition, in doing so, we have managed to consolidate our positioning in the market while defending volume and scale in the lower tiers.

Alicorp's industrial and logistics network is the largest in the country and gives us efficiency and reach that is a key driver for our market positioning, and network allows us to be closer to the markets and our customers and be able to react to competition, specifically per market. We measure Net Promoter Score as part of our metrics. In the last 5 years, we have scored well above 50% and reaching peaks of 70% in certain platforms. This metric confirms the acceptance and loyalty of our customer base as a reflection of our value proposition.

Now let's move on to Slide 28. Our business strategy is aligned with Alicorp's strategic pillars, following growth, efficiency and people. Regarding growth, we will continue to expand our portfolio, supported by a larger reach via digital platforms and tools, continue to deepen our value proposition in current segments and explore new ones and, as a driver of future growth, develop a robust cold chain.

Regarding efficiencies, constantly optimizing our operations is priority for the team as we believe that is the best way to deliver competitive prices while improving profitability. Alicorp Solutions' perspective of the whole value chain, is fundamental for a success from the planning processes to the redesign of our products and processes. In the last 4 years, we have been able to grow revenue and CapEx G&A significantly while improving EBITDA.

Finally, regarding people, all of the above-mentioned have been achieved while -- with highly motivated talent. We keep developing our human resources with new tools and know-how to push forward and increase our efficiency.

Now I will hand it over to Alfredo to open the floor for Q&A.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [9]

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Thank you very much, Stefan. And before I open up the floor to questions, I just wanted to point out that on the revenue guidance that we provided, 2 of our businesses, we have revised them downward a little bit, given the current market dynamics, both our -- the Consumer Goods Peru and the B2B business.

In the case of the Consumer Goods Peru business, the reduced guidance to 24% to 26% growth expected for the year. In the case of our B2B business, we reduced them to the 4% to 6% range. In the case of profitability for those 2 businesses, we remain very positive, and therefore, we haven't changed our expected EBITDA margin.

With that, I would like to open up the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take a question from Andres Soto of Santander.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [2]

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I have a couple of questions. The first one is related to guidance. As you just mentioned, Alfredo, you are reviewing down your guidance for Consumer Goods and B2B in Peru. Nevertheless, this guidance still implies significant acceleration in the second part of the year. I would like to understand how much depend on this acceleration on recovery on the consumer environment and how much it is based on innovation and market share gains. And what is your view in the light of the latest political events in the country? That is my first question. I will do my second question afterwards.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [3]

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Of course. Thank you, Andres. I'll give some first comments, and I'll turn it over to Patricio for additional comments on the -- for the question related to our Consumer Products Group here in Peru.

Yes, we are using our estimate based on the element that we discussed a little bit through the presentation. In -- I will say in general terms, our view of overall activity, GDP-wise, employment-wise and real [weight] growth-wise, we're seeing a significant slowdown in the economy. The most recent political events are adding additional uncertainty. And therefore, the confidence level of consumer, confidence level in the whole industry in terms of investments going forward obviously will be affected. On margin, we don't know that for sure. Those are some elements that are definitely affecting the reason why we are changing a little bit the guidance.

Still, as you mentioned, while we are forecasting a second half that will be definitely stronger than the first half, we have many elements that support that strategy on different sides of the equation for the Consumer Product group. But let me get it over very quickly to Patricio, that he actually elaborate a little bit more on that, and provide more details.

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Patricio David Jaramillo Saá, Alicorp S.A.A. - VP of Consumer Goods - Peru Division [4]

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Thank you, Alfredo. Thanks for the question. Yes, we are expecting to accelerate growth during the second half of the year, and this is basically driven by innovations on product that we have put in the market during this first or this second quarter of the year, that we expect to gain acceleration through the third and fourth quarter.

Also, as I mentioned before, we are continuing to play Intradevco's products in our district distribution system that we continue to grow over time. And definitely, this will gain some additional momentum during the back half of the year.

And finally, we have increased also our marketing spending with the introduction of new campaigns under key categories that will also speed up our innovation process. One of the key categories that we are going to be focusing on going forward is Edible Oils where, as Alfredo mentioned before, we have been seeing some reductions in terms of raw materials that we are now -- we're passing through price so then we can gain more volume of [income] going forward.

So I would say that going forward, we expect growth to accelerate, and this is supported by innovation, marketing expenditure and revised pricing of our main categories.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [5]

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Perfect. My second question is what if. What if that growth that we are expecting to happen doesn't occur, given the recent events, and leverage will remain higher than what you are suggesting in your updated guidance? What other alternatives besides selling the shares of Credicorp will you have in hand? You still have lot of assets that we can consider, like noncore assets. I would say that includes your operations in Argentina but also Brazil and significantly your operations in the animal nutrition business. I would like to understand your views on those operations, especially now considering that there is a better outlook for Brazil. It will be a good time to sell those operations. Argentina, we are seeing a turnaround. Now you can -- you have delivered on the turnaround. It is probably ready to be sold. In animal nutrition, we have seen recent transactions had multiple much higher than the implied multiple for the Alicorp valuation. So there is a clear case for creating value by selling those operations, especially now that our growth appears to be marginal, better than it was significant -- over the past couple of years.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [6]

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Thank you, Andres, for the question, a very complete one. Let me get -- tackle from different angles. First, as we had pointed out, we'll be selling those BAP shares. And that is obviously fully -- almost fully under our control, and that will happen in the next couple of months, most likely.

With respect -- in addition to that, we have other noncore assets that are obviously on the sale, which are mostly real estate assets here in Peru and a few others in other countries but are not really material. One of the element that has happened also in Peru has been a slowdown in the real -- overall real estate market, and therefore, selling large pieces of real estate are -- is not something that could be done overnight. So we are pushing those asset sales, for sure. However, we'll be -- we'll stay conservative right now as to likelihood of those events happening.

On the other elements of our portfolio, now we're talking about businesses or country-specific, we have not made any decisions as to selling one of -- or either of them, especially the ones that -- to one you actually mentioned, Bolivia -- I'm sorry, Argentina or Brazil. You're right in mentioning that Argentina is now turning the corner. Our restructuring plan has been giving us very solid results. From a growth perspective, now you're seeing a business that is growing, that is gaining share. Now our brands are gaining strength, equity and, therefore, value along the way going forward. Profitability has also been positively impacted because of the different elements of the restructuring program. The one issue, though, that is happening is this inflation adjustment for income statement is impacting negatively our results. But overall, we feel that we've turned a corner, and now we are looking forward to obviously grow better.

With respect to Brazil, Brazil is in a different situation. You might see a few of positive elements in -- with respect to political decisions, the pension approval process. However, in terms of demand, in terms of our categories that we operate in and in terms of regions we operate in, nothing is changing for the positive yet. Mostly, it's on the negative. The latest data that we have in terms of impact of overall level of activity and the country being very negative and more and more -- more importantly, in our own region, decreasing more than 4%, that is huge in terms of a category. So we are in the middle also of a restructuring effort in Brazil, and all these expense-related elements of the plan have been -- already being deployed. And we are very happy with the progress that we have seen so far. Volume-wise though, we're not pleased. The [strike] that we're pulling forward are the right ones, but the market and demand are not there yet. Hopefully, as you mentioned, we will see some positive news coming out of -- let's say, some elements of the political environment will be confident for growth, and those news start materializing in terms of confidence, consumption levels across Brazil, specifically obviously in the region we are in. So what happens in terms of M&A front on that side? I think that is not something we are currently looking at. We're more focused on really delivering on the plans that we have for both countries specifically.

Lastly, on Aquaculture, you're right. The deals, (inaudible), but the few deals are happening in that sector are occurring at high multiples. We are very much aware of them. Our business is probably one of the most coveted business, as you can see in the market. We believe we are the best operators of aquaculture here in the region, and that is reflected in our leading market shares, more importantly in the shrimp feed side. So we have a fantastic asset. We believe we are the best operators. And you may imagine, we receive a lot of interest for the asset, but I will believe that for now, that the best alternative for the company is to keep operating and generating value through our own operation.

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Operator [7]

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We'll take our next question from Alonso Aramburú of BTG.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [8]

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Yes. I have a couple of questions as well. In the case of Bolivia, we saw a large sequential decline in EBITDA margin from around 15% to 9% in the Consumer Goods space business. Can you just give us some color as to what happened there? And your guidance also calls for going back to roughly 14% EBITDA margin. What's going to take you there?

And regarding the Crushing business, here, again, I mean the margin remain negative, but it was more negative than before. It was in the low single digits. Now it's in the high single digits. What sort of margin should we sort of expect in this part of the cycle? And do you have any visibility that the cycle is going to improve in the short term?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [9]

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Thank you, Alonso for the question. Let me tackle the Bolivian one first. The impact in EBITDA is a pure effect of the acquisition of Intradevco. The EBITDA margin that we have from Fino -- the other deal is a larger business. Remember that the Intradevco deal generated revenues and EBITDA that more on a distribution nature. Therefore, the EBITDA associated with that business is lower than our business.

The Bolivia operation as a whole is extremely healthy. We're performing very well, way -- also, we are above our own expectations for both Fino and SAO as well as for Intradevco growth-wise and margin-wise. And as we pointed out during the call, market share-wise, we have had -- this is the highest market share ever in Edible Oils. We've had highest market share ever in all the Home Care side, particularly in Detergents. So we are extremely optimistic as to how profitable and also the growth that we'll be able to achieve in Bolivia specifically.

On the Crushing side, it's a different story. Specifically, Juan pointed out a number of element that need to be addressed in terms of understanding the profitability of that -- of the business today, but also in understanding the element that need to be included in how you forecast that going forward. Right now, commodity-wise, we are at a very low place in terms of the cycle. Prices are at extreme lows and are staying lower than expected for a longer period of time. Remember that we -- since the acquisition itself, we explained how closely correlated our EBITDA margins, specifically Crush margins of the Crushing business to the level of pricing specifically on the commodity side. So with low basis, it's impossible to achieve higher product margin, therefore, higher EBITDA margins for the business.

We -- our visibility today still tells us that commodity-wise, even though we don't have obviously all the elements that need to be addressed in order to forecast accurately, we believe that we will stay low at this current level or around this current level, at least, for the foreseeable few months going forward. So therefore, we don't see a pickup in margin in our Crushing business until year-end. Hopefully, all this negative impact of the trade problems that are happening between the U.S. and China, those will get resolved. That will give us additional elements that will support demand for our products -- for the commodities, I'm sorry, and therefore with that, put some additional pressure and bringing prices further up. With that, I'll be able to tell you that we should be expecting higher Crush margins for the business. Unfortunately, for the time being, we don't have that (inaudible) scenario as being a likely one. It's totally uncertain, especially coming from the U.S. and what we've seen so far. So for now, this current level (inaudible) improve for the -- the [EBITDA] the next, I'll say, 6 months, even more than that.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [10]

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Okay. So when you look at your updated guidance for Crushing, would you still show in a slightly positive EBITDA margin for the full year? I mean from what you say, there's probably some downside risk to that figure because you don't see a turnaround in the short term.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [11]

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I would think -- I think the number that we're putting forward is the number, we believe, is the right one. I will say risk going down -- look, it's difficult to say. I think for the prices to go further down, it's difficult. We already advanced in the time of the seasoning aspect of the Bolivia operation in terms of (inaudible) different crops. So going below that, I don't think so, Alonso. So the probability is low. Hopefully, we'll get some pickup actually. But for now, I'm trying to be conservative.

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Operator [12]

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We'll take our next question from Juan Guzmán of Scotiabank.

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Juan José Guzmán Calderón, Scotiabank Global Banking and Markets, Research Division - Associate [13]

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Yes. I have follow-up questions regarding your guidance and thinking beyond growth and thinking about profitability. For you to reach the lower bound of your EBITDA margin guidance and assuming a 20% sales growth year-on-year, the next 2 quarters, you should have to post an EBITDA margin of around 13.4%, which equal like 150 basis points above your most recent [print]. So we would like to understand what are the drivers that you're taking into account to reach this goal as the (inaudible) to reduce your net leverage.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [14]

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Thank you. Look, for the next 6 months of the year, we -- as Juan mentioned, we are basically maintaining our overall EBITDA margin. And I will have exact number that you actually meant, the 13.4% with me -- in front of me, but I can [view] the following. Two key businesses for us are Consumer Product and B2B in Peru. In both cases, the delivery of profitability is solid, has been solid the last 2 quarters, and it will continue solid for the following 2 quarters, even maybe if I were to pick up growth a little bit hopefully.

In top of that, remember we are increasing our guidance for the Aquafeed business. We didn't see the growth, but we're seeing higher profitability for the year going forward from different elements. One element can be in the case of Aqua -- cost of raw materials, which we said before, in the case of our Crushing business, had very low commodity price. Well, that has a positive inside as well when you talk about Aquafeed, lower cost of raw materials. One element, plus other elements associated with our efficiency programs, would allow us to actually increase our EBITDA margin for that business.

Likewise, it will happen for Bolivia. We're pushing forward for higher EBITDA margin. The -- also Juan mentioned before, the integration of both the Fino and the ADM acquisitions as well as the Intradevco acquisition is proving to be better than expected. And that on top of better performance of our existing business could -- call it that way with the business before, is giving us enough comfort to increase profitability levels going forward for the year. So that's why we are raising that element.

There are some risks associated with operation. Yes, there are some risks. We -- that's why we're downgrading our profitability expectation for Brazil and also, for different reasons, for Argentina as well, for Argentina specifically, because of the impact of the accounting, the new accounting rules associated with inflation adjustments.

So overall, we believe that the strong basis of our Peru business, both on the CPG as well as B2B, plus our better-than-expected Aquafeed profitability as well as for Bolivia business give us enough comfort to maintain our overall profitable -- profitability level for the year.

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Patricio David Jaramillo Saá, Alicorp S.A.A. - VP of Consumer Goods - Peru Division [15]

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Just complementing on Alfredo, I think that one of the basis of growth that we're seeing in the back half of the year is also driven by key categories which are high categories for margins for us, for example Detergents and Sauces. That's why we are actually spending a little bit more in terms of marketing expenditures so that we can accelerate volume growth.

Also, during the back half of the year, we have, as you know, the Christmas spread or the traditional panettones season here in Peru, which is also high margins in terms of gross profit. So I would say that some of those increased category numbers or profit numbers will come also from improved product mix going forward.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [16]

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And just finally, if I could make one additional comment. Remember that when you take a look at our business, quarter-by-quarter, there's a strong seasonality for the second half of the year versus the first half. So with that, you should always expect a strong performance of that second part of the year versus the first part.

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Juan José Guzmán Calderón, Scotiabank Global Banking and Markets, Research Division - Associate [17]

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Okay. Got it. And a follow-up question, if I may. I don't know if you have this number, but thinking about Crushing and the rest of the business segments in direction, have you quantified the sensitivity of how a change in the price of soybean helps and decreases the EBITDA margin of its business line? And what's the net effect on the consolidated EBITDA? Because of the recent [op] gains you have thanks to lower raw material prices are offset by this business line performance?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [18]

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Well, your question is a tough one. Let me tell you why, because the -- that relationship is not direct. It's indirect. As the price of the commodity varies, what will happen is on the dynamic of we as buyer of soybeans and then the other farmers in Bolivia are sellers of those beans, there will be negotiation dynamic. The higher the price of the commodity, the more profit that, that farmer actually has and therefore can actually share more with the buyer that is us. So you always have a positive impact or most likely we have a positive impact by increasing prices of the raw material -- of the commodity versus our Crush margins. However, establishing that $1 increment in the price versus our (inaudible) Crush margin is very difficult to establish. However, there's a positive overall relationship.

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Operator [19]

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We'll take our next question from [Paul Trejo] of Goldman Sachs.

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Unidentified Analyst, [20]

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Alfredo, 2 questions for you, actually, piggybacking off the back of your last statements. Can you just explain -- so when we see the Crush margin in the second quarter relative to the first, it declined a few hundred basis points. But then in the Bolivia Consumer Goods business, the gross margin was lower year-over-year, so was the EBITDA margin. So I mean how should we think about that relationship? I would've figured that lower Crush margin meant lower input costs for this business that's very exposed to Edible Oil and Detergents, et cetera. That's the first one.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [21]

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Well, I -- thank you for the question. Yes, don't worry. We'll get to the second one after.

On your first comment, first of all, the dynamics of the Crushing and the Consumer Product business is very different one. On the Consumer Product, just to give you an idea, the costs associated with the business is actually via the market price, how much would -- a commodity business -- I'm sorry, a consumer product business will have to buy a ton of crude edible oil or -- crude oil, I'm sorry. So therefore, the dynamics of the businesses are different.

Crushing will have their own dynamic, but that doesn't mean it will be a lower or a higher cost for the Edible Oil. What will happen is the commodity itself is at low levels. Obviously, that translates into a lower cost for our product. But remember that competitive dynamic of the market in the edible oil categories or some of the other fat-based categories will make you lower your own prices because you have a lower cost. In what relationship? That depends obviously on certain market dynamic. That'll happen every time. But overall, they're separate.

You mentioned also the EBITDA margin releasing -- question about the -- our Consumer Products business in Bolivia. Remember, the difference is related to the fact that we acquired Intradevco. Intradevco has a lower EBITDA margin than Bolivia or -- our shrimp feed business because our Intradevco business in Bolivia is a distribution-based business, which is a lower EBITDA margin business.

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Unidentified Analyst, [22]

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Okay. Understood. I just -- the way I was understanding the slide, I think there's one about the Crushing market dynamics, that kind of 35% of soybean oil that goes to Alicorp's Consumer Goods businesses. I thought that would've -- that part translates into a better gross margins for the CPG businesses. Yes?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [23]

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Yes. Actually, it's -- that's why (inaudible) with the flows of volumes. How we price that volume is another equation. But obviously, there's a relation but -- as you were pointing it out. Part of a big component of the volume that we produce, crude oils from our Crushing business, goes to our own Consumer Product business in Bolivia. Yes. Our Consumer Product business in Bolivia, how we cost those tons are basically based on the market value of that crude oil. That is the best way to keep everybody honest in the business. So therefore, given the competitive dynamics of the Consumer Product business in Bolivia, you will have to translate the lower cost into lower price. Obviously, every now and then, you'll be able to not fully translate that cost reduction into a pricing strategy.

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Unidentified Analyst, [24]

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Understood. Okay. My second question was with relation to the working capital. Can you just walk us through how much of the increase in the cycle is due purely to the Crushing inventories and how much is it due to bringing Intradevco's balance sheet onto the Alicorp balance sheet and just the different commercial terms that they had and if you're going to do anything to bring down kind of that working capital cycle closer to what you had in the core business before.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [25]

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Yes. Well, I guess you are referring to Slide 40, Paul?

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Unidentified Analyst, [26]

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Yes, or 35. Yes.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [27]

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Okay. Well, let's put it this way. There are many dynamics that affect our working capital, but you have linked the -- probably the most relevant one. One is the M&A-related impact which -- yes, with the Intradevco or both Fino and SAO as well as the inclusion of the Intradevco deal. Yes, our working capital has changed, (inaudible) expect increase. Why? Specifically Intradevco for example, the number of days of all -- actually all elements of a working capital account were actually way above our own. So therefore, there is potential for getting more cash out of the business by being more efficient from a working capital perspective.

That said, and as Juan pointed out during the conversation about the IMO efforts in the case of Bolivia or in the case of Consumer Products Peru, in both cases, we are working an asset to get those numbers down in different price. In the case of inventory, remember, this inventory has generated both at the raw material front as well as the end product. Those end products, in our case, we're evaluating many of the SKUs to date that don't generate too much either revenue or EBITDA. There will be some portfolio [reorganization] as part of the IMO integration process. In the case of Intradevco? Yes. That will be one source of value in terms of getting a more efficient working capital.

In the case of Fino and SAO, besides the Consumer Products element, you have the Crushing element you mentioned. From that standpoint, depending on which point of the year you are, you will have a very different impact. Why? Because there will be a point of the year where we actually buying all the soybeans that we can from the market -- from the farmers because it all happens in a couple of months' period. So in that period of time, you will have an increase in our inventory levels and, therefore on the associated financial expenses to it. But again, that will trend down.

We are working on supply chain initiatives to be more efficient as to the type of financing used to finance those purchases, specifically leveraging off on all the know-how we have achieved in our Peru operation by using this type of self-financing. With that, you'll be seeing a downward trend in comparing working capital levels through the next quarters and, in most cases, leverage off the work we're doing with the IMO programs of both the Intradevco deal as well as Fino and SAO transactions.

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Juan Moreyra Marrou, Alicorp S.A.A. - CFO [28]

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And basically, just to add. Taking away the effect of Fino, SAO and Intradevco, the cash conversion cycle basically has been improving for -- over the last years, and it's (inaudible) [include the effect of -- and again, Intradevco the] acquisition. The cash conversion cycle is around 7.9 days, which is pretty much in line to what we had in the previous 2 quarters as well. So the idea here, as Alfredo was pointing out, is to bring down those, especially, inventory days for both Intradevco and the Bolivian operation to make it more efficient and reduce our overall cash conversion cycle. And we are working on that, as we speak.

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Unidentified Analyst, [29]

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Is there any target level, Alfredo, that you guys are looking to -- or a number of days that you think you can reduce the new level of the cash conversion cycle?

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Juan Moreyra Marrou, Alicorp S.A.A. - CFO [30]

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Yes. I mean we have an internal goal here in terms of recent accounts. At least, we're trying internally to reduce for the year in a couple of days, between 1 and 2 days, yes. That's the overall picture, including the Intradevco negative effect of higher inventory, as Alfredo was pointing out.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [31]

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But here, [Paul], we need a bit more time, given that the portfolio that we received from the Intradevco transaction is huge in terms of number of SKUs. So we're going one by one. We have to make sure that we won't be reducing anything that will add a lot of value to the overall business plan that we have. So we'll be having those initial targets that Juan has pointed out, that we'll be -- potentially be more aggressive as we get a better understanding of the whole portfolio that we received from Intradevco specifically.

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Unidentified Analyst, [32]

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Understood. And Alfredo, sorry to go back to an earlier point, but just one more follow-up. In terms of the Crushing business, so the updated guidance still has a slightly positive margin for the year. I guess what's going to drive that big delta from a deeply negative margin in the first half? I apologize if you guys already answered this question.

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Juan Moreyra Marrou, Alicorp S.A.A. - CFO [33]

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No problem. We've had -- I mean as you know, there are 3 main campaigns during the year for the Crushing business, 2 related to soybean and the other one is related to sunflower. Right now, we are entering the sunflower campaign, and that is going pretty well actually. It's just starting, so it's not over yet. But the margins that we are seeing are much, much better than what we have seen in the last couple of years, which is showing a good recovery. So with that, we feel much more confident that the margins are going to be definitely improving in the second half of the year.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [34]

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And also, there's one element of cyclicality with respect to the business as well. As Juan was pointing out, give the different crops, when you are at the beginning of them, you're simply buying, you will experience very low EBITDA margin because how the accounting works. However, as you start affixing prices, now you start making actually the profit, you will see a better results as the year move forward. So what obviously the element that Juan pointed out on the sunflower crop that -- as we were saying is better than expected.

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Operator [35]

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And we'll take a question from Johanna Castro of Itaú.

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Johanna Castro Castro, Itaú Corretora de Valores S.A., Research Division - Research Analyst [36]

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I had a doubt just because of the structure of the products you guys have. My understanding is that the Detergents also use a percentage of some oil as well. Is there an impact on the low prices on the margins of this product or also it happen the same that in Edible Oils that you have to transfer the price?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [37]

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Actually -- well, actually the Edible Oil dynamics have really nothing to do with the detergent market or home care dynamic. The -- probably, from -- the commonality will be the overall level activity in our country and what is happening. Now what one could do (inaudible) could be a connecting point is there's one product that we produce, which is the laundry soaps. That is based on certain fats maybe because the value have a connection between that and what happens with the commodity.

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Unidentified Company Representative, [38]

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With (inaudible).

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [39]

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But again -- yes, with (inaudible) specifically. But again, that is not that material for our business.

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Johanna Castro Castro, Itaú Corretora de Valores S.A., Research Division - Research Analyst [40]

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Okay. And my second question has something to do with what Alfredo was talking in the beginning -- what you were talking in the beginning is that you believe that Argentina is now creating value for you. And I wanted to understand on what sense because I remember the only company that actually pays dividend or repurchase dividends is Ecuador. The company's in Ecuador. And I understand that actually Argentina had a capital injection last year at the beginning, if I'm not wrong. So are you planning to bring back money from Argentina and that's how you were saying that you're creating value right now in Argentina? Or sorry, I misunderstood that point.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [41]

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Well, definitely, my point was the following. Argentina is coming from a [sold] standpoint from a very different -- difficult period of time in Alicorp that went longer than a year. Last year, we start off a very deep restructuring program, coupled with a changing of overall organization. We sent over people coming from our Consumer Products business here in Peru. And the overall impact is very material as to getting the operation back on track, both at the top line level but also at the profitability level.

In the top line level, all our strategy that are very much aligned and leveraging off with our Consumer Product best practices now are helping us achieve very solid results, actually growing when the economy is not, gaining share in categories that were very competitive traditionally. So the results from that time, very positive (inaudible) for the last, at least, 6 months or close to a year now. So the curve trends upward.

On the profitability standpoint, our restructuring [point] have been very positive as well. The impact we're having on our results, though, is related to the accounting rules associated with inflation adjustment. So from that standpoint, we're seeing the operation turning the corner and now definitely starting to generate very positive results. However, we obviously have many different elements of the equation that will not allow us yet to start bringing back some cash. That is not part of the equation because there's different level associated with the company, so before we're paying down debt, before we spend (inaudible) let's put it this way, some dividends at the corporate level.

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Johanna Castro Castro, Itaú Corretora de Valores S.A., Research Division - Research Analyst [42]

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Okay. But one thing that actually worries me is that at some point with the operations in Colombia, there was a similar case. The market share was not significant and the size of the operations in that -- in the country, taking the case of Colombia, was not relevant for you. I still don't understand why, if you have offers on the table, you don't sell it and just forget about the Argentina for good?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [43]

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Well, the Argentine operation, as I said, it's now in a positive momentum despite the fact again that the country is not. Whether or not we want to sell it, that's the different story as I said before. There was a question associated with not only Argentina but also with Brazil. I think the country still has a long way to go. Nowadays, if you take a look at just (inaudible), make an argument about it. If you take a look at what deals are being done, things like that, the multiples being paid are extremely low. And again, selling a business in this environment is not positive. But now taking that theme aside, I think that the process, even though it's been long and hard, has been a positive one for us right now. And again, in terms of what future decision we'll take, again, we'll have to

(technical difficulty)

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Operator [44]

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And that concludes our question-and-answer session for today. I'd be happy to return the call to Mr. Perez for any concluding remarks. And once again, I would like to ask Mr. Perez for any concluding remarks at this time.

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [45]

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Well, as I said at the beginning, I wanted to thank you guys for participating on the call. I think many questions have been asked, and I appreciated all of them. Please feel free to contact our Investor Relations team for any other questions that you might have.

The year, even though it's a challenging one, we see still -- we're still motivated, enthusiastic about the prospects for the second half, even though there's still some elements of the business, especially on the macro front, that provides some uncertainties.

But again, thank you very much for the participating on the call and of being part of Alicorp. Thank you.

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Operator [46]

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Thank you. This does conclude today's Alicorp 2Q '19 Earnings Conference Call. You may now disconnect your lines, and everyone, have a great day.