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Edited Transcript of ALICORC1.LM earnings conference call or presentation 8-Nov-19 4:00pm GMT

Q3 2019 Alicorp SAA Earnings Call

na Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Alicorp SAA earnings conference call or presentation Friday, November 8, 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

* Luis Enrique Estrada Rondón

Alicorp S.A.A. - VP of Corporate Commodities

* Patricio David Jaramillo Saá

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

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Conference Call Participants

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* Alonso Acuna Aramburú

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

* Felipe Ucros Nunez

Scotiabank Global Banking and Markets, Research Division - Analyst

* Paul Trejo

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good morning, 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 good morning, everyone. We are very pleased that you could join us today. From Alicorp, we have Mr. Alfredo Perez, Chief Executive Officer; Mr. Juan Moreyra, Chief Financial Officer; Mr. Patricio Jaramillo, Vice President, Consumer Goods Peru; and Mr. Luis Estrada, Vice President, Commodities and Crushing.

Today, they will be discussing the third quarter 2019 results after the press release issued by the company on Monday, November 4. If you have not yet received a copy of 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're a member of media and wish to direct any questions 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, the forward-looking statements are based in 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 third 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 quarter.

I'll begin today's call by reviewing the Latin America macroeconomic and political environment and the performance of our key markets. Please turn to Slide 3. This quarter has been challenging for Latin America region given the -- as a result of the U.S.-China trade tensions and more recently, the latest political and macro events in some emerging market countries such as Chile, Ecuador and Bolivia.

In Peru, although growth prospects remain on top of the Latin American peers, most analysts have been reducing their growth prospects for 2019 quarter-by-quarter. Estimates started at 3.8% at the beginning of the year and have been reduced continuously to the current 2.2% GDP growth estimates. We believe political uncertainty has played a key role in the slowdown, which peaked with the dissolution of Congress. As a consequence, consumer confidence deteriorated, which affected market growth in most of our categories.

But in Bolivia, strikes and protests following presidential election results, which are being considered by external observers as potentially fraudulent, will likely have a negative impact on the economy. However, it's still too early to provide an estimate of its real magnitude. In addition, a difficult external environment related to the oil and gas international prices had dragged down economic growth for this quarter. As a consequence, GDP growth estimates for 2019 decreased from 4.4% at the beginning of the year to the current 4%. The aforementioned events after the presidential elections took place, resulting roadblocks and general population unrest, which temporarily impacted product distribution to our clients as well as intermittent hauls and oil production activities.

In Ecuador, we expect a 0.1% GDP contraction by the end of 2019 compared to a 0.9% growth estimate at the beginning of the year as the [real spectrum] weakened the recovery base. Moreover, the latest domestic events such as widespread protests and the state of emergency declaration, following the removal of subsidies to gasoline and a new corporate tax, will most likely compromise future economic growth as well.

In Brazil, we started to see signs of GDP growth on the back of industrial production growth and consumer confidence recovery due to the passing of the Pensions Reform Bill. However, the economy is seeing now growth only of 0.9% in 2019 compared to a 2.4% growth forecast at the beginning of the year. Despite this context, the economic activity is expected to pick up in 2020.

Regarding Argentina, economy is expected to contract 2.8% this year as opposed to an estimated 0.9% decrease at the beginning of the year. The new political landscape after the victory of the Peronism in the presidential election is expected to have a negative impact on all major macro indicators, potentially driving inflation up and favoring a further tiering down in most consumer product categories.

In Chile, social unrest continues against the government economic agenda, which is resulting in a decrease in GDP growth prospects on 2019 from 3.3% at the beginning of the year to the current 2.6%. These conflicts could potentially hurt our resolved levels of all consumer products in the country.

Let's now discuss the main highlights of our consolidated quarterly results on Slide #5. Consolidated revenue and volume grew 17.4% and 28.7%, respectively, versus Q3 2018, mainly driven by the acquisition of Intradevco and the acceleration of our quarter-on-quarter organic growth, mainly in Peru. The acquisition of Intradevco is contributing approximately $400 million in incremental revenue per year and PEN 209 million of total revenue growth for the quarter and will be critical in providing additional momentum to secure growth in the long term.

Organic revenue increased 3.2% this quarter as our consumer goods unit showed sustained growth despite continued slowdown and reduced consumer confidence in all of our key markets in Latin America due to the recent events previously mentioned. It is important to mention that third quarter 2019 organic revenue includes Fino and Sao consumer segment figures acquired on May 17 and July 24, 2018, respectively.

Consumer Goods Peru grew 1.2% year-over-year organically, and we continue to gain market share despite market contraction in certain key categories. Our Consumer Goods International division also presented positive results, growing 5% year-over-year, mainly driven by strong performance in our Bolivia and CAM-Ec operations. As for B2B, revenue increased 3.8%, supported by growth across all platforms in spite of a tiering downtrend and intense competition registered in the market. We achieved these results thanks to our successful pricing and go-to-market strategies in addition to cost efficiency initiatives that allowed us to increase our margin as well.

As for Aquafeed, revenue volumes increased 3.3% and 5.9% year-over-year, respectively. Our shrimp feed Nicovita business in Ecuador continues to deliver strong growth. We remain the #1 player in shrimp feed in Ecuador. And regarding our salmon feed business, we resumed growth this quarter and maintained our market position despite the price reductions in the marketplace due to lower raw material prices, market consolidation and aggressive competition.

Finally, on a year-to-date basis, our top line grew 20.5% versus 2018.

Let's move now to Slide 6 to review our consolidated EBITDA performance. Moving on to profitability, Alicorp's consolidated EBITDA grew 32% for the quarter versus 2018, supported by the acquisition of Intradevco. EBITDA margin increased 1.7 percentage points to 14.8% for the quarter, mainly due to our cost optimization strategy across businesses.

Organic EBITDA for the quarter grew 3.1% versus 2018, underpinned by a strong performance of all of our B2B business segments, our shrimp feed segment in Ecuador and also high profitability in our CGI business, we believe we are outperforming. Organic EBITDA margin remained flat at 15.4% compared to the same quarter of last year with margin increases in our B2B and CGI businesses and slight decreases in CGP and Aquafeed businesses.

To further explain and understand our profitability for the quarter, it is important to point out 2 effects that impacted organic EBITDA growth, particularly in our Consumer Goods Peru and Aquafeed businesses. First, as a firm, we're in the process of building new capabilities and new teams that we expect will have material impact in our growth, profitability and return levels in the medium and long term. This investment in new capabilities include building innovation and digital transformation centers of excellence, the consolidation of our sustainability strategy in Peru, among others. The result of these investments was a higher SG&A expense on our Consumer Goods Peru unit in the quarter, therefore, impacting its profitability.

The second one I would like to explain is that in 2018, we conducted a full compliance review of our bad debt provisions to -- today according to our risk management policy. This review resulted in the reversal of approximately PEN 21 million in provisions. These nonrecurring onetime income had a positive impact to the result of mainly our Aquafeed business in 2018 third quarter results, therefore, increasing its profitability for that quarter. For comparison purposes, excluding both effects, overall organic EBITDA would have increased 10.7% year-over-year, while organic Aquafeed and Consumer Goods Peru EBITDA would have increased 15.1% and 5.3%, respectively, therefore, increasing organic EBITDA margins as well.

Now moving back to our overall profitability and performance review. Excluding our Crushing unit, our consolidated EBITDA margin, organic and M&A, reached 15.6% during the quarter, an increase of 1.2 percentage points year-over-year. The significant increase proves that we are on the right track in terms of expected profitability from both our legacy businesses as well as all the new acquisitions.

Regarding our Crushing business, its EBITDA registered an important turnaround this quarter due to the higher volume from larger-than-expected sunflower seed and soybean crops. This positive result was registered despite the continued low levels of the industry's crush margins as a result of the low commodity prices worldwide. We continue to take different actions to increase profitability and reduce volatility for our Crushing business in this low commodity cycle environment, which we will later discuss in detail.

Finally, as for year-to-date results, our total EBITDA grew 17.9% versus 2018 on the back of synergies from our recent acquisitions and our efficiencies program.

Let's move to Slide 7 to share with you our financial milestones during the quarter. Regarding our financial leverage, our net debt-to-EBITDA ratio on a pro forma basis improved to 2.96x as of Q3 2019 from 3.75x as of Q2 2019. These ratios include the effect of IFRS 16. Such an improvement was due to, one, a higher EBITDA LTM pro forma basis; second, lower net debt, which was further reduced by the positive inflow from the sales of Credicorp shares, which amounted to $103 million. And going forward, we reaffirm our net debt-to-EBITDA ratio range at the end of the year for 2.5x to 2.7x.

Let's move on to the next section to discuss the operating results of our various businesses. Along with the results, my team will provide an update on the current macro situation and sector dynamics. Patricio Jaramillo, our VP for Consumer Goods Peru, will begin with Consumer Goods Peru on Slide 9.

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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. Despite the slight upturn in the employment rate during the third quarter of 2019, there are still no significant signs of recovery for the Peruvian economy. After a weak first half of growth only at 1.7%, GDP projections for 2019 have been repeatedly revised downwards and are now expected to close the year at 2.2% year-over-year, the lowest number since the 2009 economic crisis.

The slide of significant growth is primarily driven by the slowdown of the total investment rate as a consequence of the deteriorated political environment since July. Private investment, which represents almost 80% of the total investment, is forecasted to end the year at only 2% year-over-year growth. Consumer confidence remains very low. And consumption is almost flat versus the previous year in many categories. Alicorp's categories basket composed by food and home care products grew only 0.5% year-to-date versus 2018. And it's mainly flat during our last bimester.

Additionally, as measured by Kantar, results of the Healthy Nutrition Act, 2 months after its introduction in June, show that label products are decreasing 2.6% in volume versus the same period of 2018. Alicorp's categories impacted by the new labeling standards account for 16% of our total food portfolio and include products in categories such as sauces, cereals, cookies, crackers, panettones and margarines. Within this scenario, we continue to gain share in key categories with important increases in pasta, margarine, tomato sauces, canned tuna and stain removers on a year-to-date basis when compared to last year.

Now let's move on to Slide #10 to provide you more insights about Intradevco's performance. Picking up from our second quarter 2019 earnings call, we remain on track with our integration plan and continue generating incremental value through synergies, value creation initiatives and an efficient execution of our business-as-usual model. These initiatives, coupled with a successful team integration, have provided us with a better-than-expected result in comparison to our business case, resulting in an incremental 2024 run rate EBITDA in the range of $12 million to $16 million.

Intradevco's estimated revenue for 2019 is expected to grow 4.2% compared to our business case, mainly due to improvements in our gross-to-net strategy and the inclusion of key categories in our exclusive distributor channel. We have been diligent in building more efficient gross-to-net initiatives, revising and optimizing our value offer in key categories within the traditional trade and modern trade as well. And we have also levered on Alicorp's direct distribution network to include new key categories such as dishwashers, all-purpose cleaners and liquid soaps.

In terms of EBITDA, we are expecting a 9.6% increase versus our business case, driven by new design-to-value initiatives and optimized marketing expenditures. Our operations and commercial teams have been working together to define and implement new design-to-value synergies for detergents and all-purpose cleaners, generating cost efficiencies in many product formulations.

Also, we have optimized marketing expenditures through the better media and agency contracts by aligning Intradevco's commercial terms with Alicorp. Our integration management office will continue to lead our integration plan and focus on building up processes and information systems integration. We will center on developing and monitoring key KPIs, further our analysis for the use of historical data and process integration focused on targeting future growth opportunities.

Let's move on to Slide 11 to discuss Consumer Goods Peru third quarter 2019 performance. Reported revenue and volume from Consumer Goods Peru business grew 22.1% year-over-year and 28.5% year-over-year, respectively, reaching PEN 885 million and 190,000 tons. The acquisition of Intradevco mainly explains the double-digit increases versus last year. Organically, revenue grew 1.2%, being the main contributors the following categories: panettone, increasing 18.1% year-over-year due to the successful start of the Christmas campaign coupled with innovation in our lead brand, Blanca Flor; margarine, showing 21.1% year-over-year of growth, supported on a larger production capacity and improvements in our fill rates; pasta, increasing 4% year-over-year, driven by the development of our Tier 3 strategy for the Nicolini brand; and cookies and crackers growing also 4.6% year-over-year, backed by the innovation within our core brands and the positive impact of commercial activities in the traditional trade and also the modern trade channel. This growth was partially offset by Edible Oils' lower revenue due to pricing reductions in line with lower commodity prices and also by lower revenue in sauces and cereals due to the implementation of the Healthy Nutrition Act discussed earlier. If excluding these effects, revenue growth would have been 3.7% year-over-year.

Regarding profitability, gross profit increased 27.1% year-over-year, while gross margin improved 1.4 percentage points, reaching 35.9%. Excluding Intradevco's acquisition, gross margin was 35.8%, 1.3 percentage points above the same period last year due to lower raw material prices, mainly soybean and palm oil and cost savings from design-to-value initiatives.

Reported EBITDA reached PEN 181 million, a 17% increase with an EBITDA margin of 20.5%. Excluding Intradevco's results, EBITDA reached PEN 152 million with an EBITDA margin of 20.8%. This 1.7% decrease year-over-year is explained by Consumer Goods Peru long-term investments in digital transformation, the creation of our innovation center of expertise and the implementation of local programs within our corporate sustainability strategy mentioned by Alfredo earlier. Excluding these expenses, EBITDA would have reached PEN 160 million, growing 5.3% year-over-year with an EBITDA margin of 21.8%, 0.8 percentage points above our third quarter 2018 figures.

Finally, reported year-to-date 2019 revenue increased to 21.6% year-over-year, while EBITDA increased 14.7% year-over-year also. In addition, EBITDA margin amounted to 19.4%, mainly by the consolidation of Intradevco's results.

Now let me pass the floor over to 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 [5]

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Thank you, Patricio. Let's move to Slide 12, B2B update on market dynamics. B2B market dynamics are explained by the increase in restaurant GDP, which showed an increase of 4.7% in the previous quarter, mainly driven by the higher out-of-home consumption due to various gastronomic firsts.

Additionally, market price dynamics have been strongly impacted by lower commodity prices that have been below the averages over the last 3 years. However, the end of the quarter was impacted by the upward trend in soybean oil prices, which positively resulted in a reduction of aggressiveness from our competitors.

Tiering down has continued as a result of low commodity price cycle and has pressured prices down. In this context of tiering down and raw material prices at low levels, Alicorp has managed to retain leadership in the platforms in which we compete and increase its profitability through the multi-tier and multichannel study that allow us to compete without destroying the value of our brand. This strategy has allowed us a 4.7% growth in revenue while gaining 1.7 percentage points in EBITDA margin in the last 2 years.

Our Food Service platform has reached 3.8% growth with an expansion of 3 percentage points in EBITDA margin in the last 2 years. This lower revenue growth than the average of all our platforms is explained by our Edible Oils strategy for increasing profitability. Excluding this category, Food Service growth for the last 2 years would have been 7.1%.

Now let's move to Slide 13 to discuss B2B third quarter 2019 performance. The B2B business reported sales of PEN 438 million, a 3.8% growth year-over-year. Our lead platforms, Bakery, Food Service and Industrial Clients grew year-over-year, being the most significant Bakery with 5.3%, a significant improvement to what we experienced in the second quarter. Food Service growth reported 1.7%, explained by Edible Oils profitability strategy. Excluding this category, growth would have been 10%.

Regarding profitability, gross profit reached PEN 92 million, growing 15%, while gross margin increased by 2 percentage points, reaching 21.1%. And this improvement came as a result of: one, controlling the tiering down effect in oil and flower with robust pricing and revenue management strategy; two, capitalizing the efficiency program to reduce costs executed in the first half; and third, capitalizing the lower raw material costs in crude oil. EBITDA reached PEN 61 million, increasing 23.4% year-over-year, while EBITDA margin totaled almost 14%, increasing 2.2 percentage points due to a higher gross margin.

Finally, as of year-to-date, we saw revenue grew 3.6% versus 2018 with an increase of 2.1 percentage points in the gross margin, reaching 21.3%, while EBITDA grew 20.2% versus 2018 on the back of higher volumes and gross profit improvement.

Now let's move to Slide 14 to discuss Consumer Goods International quarter 3 2019 performance in order to give you as much of our business. First, let me begin by giving you some insights about how the latest social and political context affect our performance in the different countries where we operate. Regarding Bolivia, we are currently operating at a medium industrial capacity. And in spite of roadblocks, there was not any material impact in our logistics and dispatches. However, if this context continues in the coming months, it might possibly affect the normalized operation of our business. Among other geographies such as Ecuador, Chile and Argentina, we haven't seen any material impact on our operations. But we remain cautious about how the market unfolds and the political decisions that will be taken in the future.

Now let me move on to the Consumer Goods International third quarter financial performance. Reported revenue amounted to PEN 406 million with -- while volume reached 103,000 tons, growing 11% and 20% year-over-year, respectively, mainly explained by the acquisition of Intradevco, which contributed PEN 57 million in revenue terms and an organic growth, which contributed PEN 80 million. Excluding the impact of acquisition and IAS 29, revenue increased 5% year-over-year to PEN 384 million behind the strong results in our Bolivia, Argentina, Ecuador and Central American operations, which were partially offset by soft results in Brazil. Regarding CGI profitability, excluding the impact of acquisitions and IAS 29, gross margin was 28.9%, increasing 0.7 percentage points year-over-year behind revenue management and cost saving efforts.

As for the third quarter of 2019 EBITDA, it amounted to PEN 37 million, an increase of 6.2x year-over-year versus the reported number of the third quarter of 2018, results which include PEN 20 million in a onetime nonrecurring expense, primarily due to the Fino and Sao acquisitions. Excluding this impact in the base period as well as the impact of Intradevco and IAS 29 in the current period, the third quarter 2019 EBITDA grew organically very 37 -- sorry, 34.1% year-over-year. Organic EBITDA margin was 9%, which represents an increase of 2 percentage points over the 7% margin of the third quarter of 2018.

These results were due to increased profitability in Argentina behind volume growth, revenue management and restructuring; two, increased profitability in Bolivia behind our integration synergies; and three, increased profitability in the CAM-Ec region behind sales growth and efficiencies. These effects were partially offset by the lower EBITDA in Brazil behind a continued challenging pasta market environment in the midst of restructuring efforts.

Year-to-date, revenue increased 33.4% year-over-year to PEN 1.24 billion, while year-to-date EBITDA increased to PEN 77 million, up 4.3x year-over-year increase, mainly explained by the acquisitions of -- the acquisition of Intradevco and EBITDA growth in Bolivia, CAM-Ec and Argentina. Year-to-date EBITDA margin increased from 1.9% to 6.2%.

Now let's move to -- on to Slide 15 to discuss Bolivia, its Q3 2019 performance. Reported revenues reached $46 million in the third quarter of 2019, which represents an almost 20% increase year-over-year, explained by the acquisition of Intradevco, growth in our food platform behind pasta, edible oils and margarine categories and double-digit growth in our laundry platform as a result of a multi-tier strategy with the Bolivar brand in the premium segment, the UNO brand in the mainstream segment and the Patito brand in the value segment, which together have achieved our highest market share in the category of nearly 20%. Organic revenue growth for the third quarter, excluding Intradevco, was also double digit, up 10.3% over the third quarter of 2018.

In terms of profitability, gross profit amounted to $30 million in the third quarter of 2019, a 15.2% increase over the second quarter of 2018, behind revenue growth, with a gross margin of 27.4% compared to 28.5% for the third quarter of 2018. The lower margin compared to the last year is mainly explained by a revenue mix effect that now includes the lower margin of the acquired Intradevco business, partially offset by higher margin in Edible Oils due to the combination of our pricing strategy and lower raw material costs. Organic gross profit grew almost 10% versus the previous quarter of 2018 -- the same quarter.

EBITDA for the third quarter of 2019 reached $7 million, which represents an 8.5x increase when compared to the results of the third quarter of 2018, mainly due to onetime cost in the base period related to the acquisition of Fino and Sao. EBITDA margin for the third quarter of 2019 was 15.4% compared to a 2.2% increase in the second quarter of 2018. Organic EBITDA growth, not taking into consideration Intradevco in 2019 and nonrecurring expenses in 2018, was up 28.5%, behind synergies and value-creation initiatives laid out in our integration management office plan.

Finally, year-to-date revenues increased 2.1x to $129 million, while EBITDA increased 4.1x to $17 million with an EBITDA margin of 13.4%, mainly explained by the Fino, Sao and Intradevco acquisition, organic growth in the food and home care platforms and our synergy program.

Regarding our Fino and Sao acquisitions, we expect by the end of 2019 an increase in revenue of approximately 3.7% compared to the due diligence, mainly due to the volume share gains in our core categories such as Detergents and Edible Oils with growth of more than 3% and more than 5%, respectively.

We also implemented some initiatives to improve our total sales such as the relaunch of our UNO brand in order to consolidate our portfolio and the implementation of the following commercial projects: one, suggested order with the objective to increase revenues in 4% in traditional channel through the use of advanced technology and data analytics; two, client segmentation in order to increase sales in 20% in our premium clients; and thirdly, the call center implementation in order to reduce our receivable base and increase sales.

In terms of profitability, we expect by the end of 2019 an increase in EBITDA of 3.3% versus what we projected during the due diligence, mainly explained by cost reductions and raw material standardization as part of our [Suma] program, reduction in transportation costs of our products and also efficiencies in our SG&A expenses.

Now let's move on Slide 16 to discuss Aquafeed, and I'll give you an update on the market dynamics. As you know, the market dynamics of shrimp and salmon are different. First, let me comment on the current market environment for shrimp space.

Ecuador, our largest market, has maintained its annual growth rate of over 26% year-on-year despite the new sanitary controls imposed by China on shrimp imports in September. Even with the various restrictions, the exporting companies have continued to export normally. Export flows are steady with more control at the port of origin. China's increasing consumption of shrimp in the main -- is the main driver of Ecuador's production. The main reasons are the growth of the purchasing power of the middle class and the spread of swine fever resulting in the increased consumption of other protein sources.

As a result, demand for Ecuador shrimp remains strong, and today, Ecuador is the #1 shrimp exporter to China. It is important to highlight that shrimp is the most important nutritional export flow of Ecuador. It is worth noting that the impact of process in Ecuador against the previously mentioned government measures to meet the [IMS] program to strengthen (inaudible) did not have any material effect in our operation.

In terms of businesses -- business performance, we continue to lead the market in Ecuador. However, we have grown below market levels due to capacity constraints in our production plan given the strong growth of previous quarters as well as a contraction in production levels of our main clients. For this reason, we have just started expansion of our shrimp facility to add 34% more capacity in Ecuador.

Now let's talk about our salmon feed and its current market dynamics salmon harvesting in Chile increased 60% year-to-date, while international prices remained flat. Despite a more challenging environment due to market consolidation through some M&A activities and vertical integration of salmon producers who entered the feed industry as well as more aggressive competition, which affected prices and gross margin, we have maintained our 11% market share.

Protests in Chile had a slight impact on our salmon feed distribution due to roadblocks and delay in certain clients' production. However, we believe this event will not affect our operations significantly for the rest of the year. An event worth mentioning is that we have finished our salmon plant expansion with 66% more capacity. This expansion will allow Vitapro Chile to meet future demand for new clients and produce high energy feed.

Now let's move to Slide 17. I will provide you with third quarter 2019 performance review for the Aquafeed business. Regarding our third quarter results, reported revenue reached $162 million, representing an increase of 3.3% year-on-year. And volume amounted to 152,000 tons, an increase of almost 6% year-over-year. Our Aquafeed business has mixed results in different geographies, regions where it operates. On the positive side, we had a healthy performance on the shrimp feed business in Ecuador, our largest contributor to EBITDA in this business segment. Growth and profitability in the Aquafeed business segment growing 7% year-over-year on the back of strong demand.

And in Chile, we also had a strong performance in terms of volume growth, achieving 12.5% year-over-year. This was achieved mainly thanks to an increase in our spot sales. On the other hand, our core profitability has decreased due to the new market dynamics previously mentioned. However, in Central America, which is a smaller market for us, there has been an increase in additional competition environment, which had led to a reduction in our sales.

Regarding profitability, our gross margin increased 2.2 percentage points due to our cost optimization strategy, partially offset by the moderate tiering down in the shrimp business that affected our price mix. EBITDA reached $24 million with an EBITDA margin of 14.8%, down 1 percentage point, mainly due to reversals of bad debt provisions, which positively impacted the 2018 results. Excluding this effect, EBITDA margin would have been -- sorry, would have increased 1.2 percentage points.

Year-to-date, revenue grew 1.8% to $434 million as a result of lower volume sold on salmon feed due to the strike which took place at the beginning of the year. Such lower volume for the first quarter has been partially recovered in the last 2 quarters. However, year-to-date EBITDA, excluding the reversion of bad debt provisions, would have increased 2.9% to $64 million due to higher volume of our shrimp business, higher gross margin resulting from our cost optimization strategy and the positive impact of our recent efficiency program.

Please allow me to pass the floor to Luis Estrada, our Commodities and Crushing Vice President, who will share with you insights about our Crushing business.

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Luis Enrique Estrada Rondón, Alicorp S.A.A. - VP of Corporate Commodities [6]

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Thank you, Juan. Let's move on to Slide 18, Crushing third quarter 2019 performance. Let's briefly discuss the performance of our Crushing business for the quarter.

Volumes sold increased 95.5% year-over-year, mainly due to larger sunflower seed and soybean crops and inclusion of Sao's results for the full quarter. Moreover, total revenue amounted to $96 million, an increase of 79% year-over-year. This growth was also mainly explained by the larger bean and sunflower crops.

Our EBITDA for the quarter amounted to $8 million with an EBITDA margin of 8.8%, an increase of 10.1 percentage points. Excluding nonrecurring expenses related to Fino and Sao acquisitions in quarter 3 of 2018, EBITDA would have increased $5 million from $3 million to $8 million, and EBITDA margin would have increased 2.6 percentage points from 6.2% to 8.8%. This increase was mainly explained by the beginning of the sunflower season with better-than-expected profitability, the end of the summer soybean season, which had lower-than-expected margins and better-than-expected synergies as well as SG&A optimization implemented as part of the integration process.

We are actively working on various levers to increase profitability for the business in this low-priced commodity environment. Among these initiatives are: first, the agro solutions, which involves selling agricultural inputs to soybean and sunflower seed producers as well as offering our idle storage capacity to sorghum producers; two, soybean oil and soybean meal programs, which involve commercial alliances with the poultry industry and soybean oil refinery; and three, efficiencies in logistics by generating economies of scale via consolidation of shipments with other regional players.

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

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

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Thank you, Luis. Let's move on to Slide 20, consolidated guidance.

First, our consolidated revenue growth remains unchanged from 20% to 24%. However, we're downgrading the expected growth in most of our business units in light of lower growth expectations in the region due to recent events that impacted our Peru unit, Brazil, Southern Cone and CAM-Ec. In addition, we're adjusting our revenue growth guidance for our feeds business due to the impact of cost (inaudible) on prices in our salmon feed business.

Second, we are upgrading our consolidated EBITDA margin estimate to a range from 13% to 14% on the back of positive momentum of our Peru unit in both CGP and B2B and our current feed segment as well as the ramp-up of synergies from our Bolivia and Intradevco acquisitions.

Third, for net income margin guidance, it remains at the range between 5% and 7%. In terms of ROIC, we're also maintaining our estimate between 10% to 12%. Excluding Crushing business, our expected ROIC range should be between 11% and 13%. Just a reminder, our ROIC has been recalibrated following the acquisitions in Bolivia and Peru, which include all goodwill generated.

Then we're maintaining our expected net debt-to-EBITDA range from 2.5x to 2.7x. Moreover, adjusted net debt to normalized EBITDA remains at the same expected range of 2.3x to 2.5x by year-end. This ratio excludes Crushing business working capital, resulting from our cost optimization strategy, and three, the positive impact of our B2B improvements.

Expected EPS remains unchanged between PEN 0.60 and PEN 0.85 per share. And finally, we maintain our CapEx target range from this year between PEN 330 million to PEN 380 million, which also includes the capital requirements of our recent acquisitions.

We'll now begin with the Q&A session.

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Questions and Answers

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Operator [1]

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Your first question comes from Alonso Aramburú with BTG.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [2]

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Three questions on my side. First, on the Aquafeed, can you comment on when will the new plant in Ecuador will be ready so you don't have these constraints in terms of production?

Second, maybe you can give us some color on the digital initiatives that you mentioned. Regarding the costs related to the digital initiatives, are those to be considered one-offs for this quarter or the next couple of quarters? Or are these going to be expenses that will continue to be recurring for the next few quarters?

And finally, maybe you can give us some color on Brazil, which has continued to be very weak. Maybe your expectations as to when do you expect to be EBITDA-breakeven there.

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

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Thank you all very much, Alonso, for the questions. I will just take one by one. On the Aquafeed front, as we mentioned, given that the market has been growing faster than we expected, we have been suffering from limitation on our capacities. However, new capacity is already coming into production in the next 3 months or so -- actually, next 2 months. So from that, we'll be fine. However, our expectations for the market, as Juan was pointing out earlier, for the next few years, are actually -- they will continue growing very high, between -- range between 15% to 20% or so per year. So I wouldn't be surprised. We'll be evaluating, again, further increases in capacity 12 to 18 months further from today move forward.

Then the second point with respect to you on the expenses that we actually make some comments on. Obviously, the one referred to 2018 on the -- on those provisions, that is a onetimer. So that is -- that won't happen again. On the other front, which is all -- the comments we made with all those investments that we are making in adding new capabilities to the company, namely, innovation, digital, our own talent program in Peru as well as sustainability initiative, I would say, more or less, they should actually stay on course for the future as we believe that those investments will have a significant impact not only on growth but also have an impact in further pushing forward our efficiency program and also having more of a long-term perspective in our business model. Next year, hopefully, we will see a few of them actually coming into the market as we speak.

Then the third point, which is color on Brazil. Brazil as a market for us is challenging. From a top line perspective, I would say, mostly. Structurally, as you know well, we are in one category, which is pasta. And the pasta market is something that significantly changes within the region that we're in from a go-to-market perspective and from a consumption perspective as well, tiering down from consumers. In terms of profitability, it's a very different story. You will see the next quarters move forward. Our EBITDA has been suffering from all the restructuring initiatives that we've been pushing forward as the months of this year have been moving by. So you will see on the fourth quarter, I think, a very different picture that would be more of how we see the business going forward.

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Operator [4]

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(Operator Instructions) The next question comes from Felipe Ucros with Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [5]

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Let me just -- Alonso hit most of the ones that I was going to ask, but let me ask you another one about shrimp and what's happening in China. Obviously, because of the pork swine diseases, that's driving up the protein demand from any other sources around the world. And I think you briefly mentioned it in the call that it's helping your shrimp production. So I wanted to ask you how long you think these effects are going to last and whether they'll also have a positive effect for salmon in Chile.

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

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Yes. It's a good question, actually. Let me take it with the following angle. As you correctly point out, there had been sort of a crisis in the protein world within China that obviously had an impact globally due to the size of its market. That has the effect in many different protein sources, including shrimp. But to be honest, we haven't seen a material impact on shrink demand because of that. It might be a little bit of a change but nothing really material.

What we're seeing is something different, which is China, as you know well, first of all, it's the largest in the shrimp producer in the world or around the world. We don't have the latest data. But they are, by far, the largest -- they have the largest demand for shrimp. In terms of the consumption of shrimp, we're seeing the major of shrimp being potentially the best product that they actually buy. And they, I think, actually pay different prices with that product.

So Ecuador as a source of shrimp, it is a preferred product for the Chinese market, and we see that advantage for the Ecuadorian producers moving forward for the next at least 3 to 5 years. So from that standpoint, I think irrespective of what happened with the price that you mentioned, Felipe, I think that the fundamentals for demand for Ecuadorian shrimp remains very solid.

And that was exactly the reason that I'm referring to in my earlier response to Alonso's question as to how our capacity -- where our capacity is going to be coming online. I think that we'll have some new coming online in the next couple of months, but we're already evaluating new potential incoming capacity increases because we are very bullish as to the growth expectations of the shrimp production. And obviously, you mentioned specifically about the crisis. We believe it will get resolved in the next potentially 3 to 5 years. But again, the impact on the shrimp industry, I think, is not really material.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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Okay. Great. And just to be clear, you mentioned that you expect the industry to be growing at a very high pace. Do you expect that you guys will keep up with industry, gain some market share? Or do you -- or will you lose some because of the constraint? Just wondering now that we know the number you're expecting for the industry, what do you expect for Alicorp in that segment?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [8]

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Thank you very much for the question, again, Felipe. I think my expectation is we should always be growing around what the industry is growing. Obviously, again, this is a B2B business. So you have certain concentrations in clients. So if you have a client, it's growing above or below the average level. It might impact your growth rate. But overall, my expectation is to be around what the industry within Ecuador is growing.

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Operator [9]

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And the next question comes from Paul Trejo with Goldman Sachs.

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Paul Trejo, [10]

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Question on the Crushing business. This recovery in terms of margin, was it just kind of better seasonality for sunflower and soybeans in the second half versus the first half? Or is there some improving trends in terms of mill oil prices and crushing margins that you can see lasting further into 2020?

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Luis Enrique Estrada Rondón, Alicorp S.A.A. - VP of Corporate Commodities [11]

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Basically, mainly it's been accounted for the improvement of the sunflower seed profitability season, but we're also seeing and forecasting for 2020 commodity market that would still be within the lower cycle but slightly higher from -- if we compare from 2019. So that would be -- and also, we have been capitalizing on the synergies that we predicted with acquisitions.

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Paul Trejo, [12]

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So we can think about 0 margin or positive for next year? I don't want to put you on the spot for guidance, but somewhat similar or better than 2019.

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Luis Enrique Estrada Rondón, Alicorp S.A.A. - VP of Corporate Commodities [13]

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It's very difficult to predict how exactly the commodity markets will evolve, but we're working with the team to make sure we have better result than what we were expecting before.

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Paul Trejo, [14]

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Great. And just one other one. Regarding Intradevco, mainly in the integration in Peru, can you talk about in terms of portfolio rationalization and kind of working capital improvements, have you started -- have you mapped out initiatives on that front? And kind of what gains could we see kind of in the midterm?

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Alfredo Luis Miguel Eduardo Perez Gubbins, Alicorp S.A.A. - CEO [15]

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Thank you for the question. Yes, we are in the process of accelerating all of the programs within the synergy strategy that we designed when we actually made the integration of the purchase. There are special advances on the complexity. As you know, Intradevco has almost 2,000 SKUs when compared to almost 600, 700, that Consumer Goods Peru has.

So there are significant advancements on that, not only within detergents, which are the biggest category that Intradevco has, but also within some other small ones such as all-purpose cleaners, stain removers and other categories. I would say that advancements on the complexity will be coming in perhaps during the first quarter of next year, as planned by that.

And also in terms of working capital, there are also advances on that. We are in the process of integrating our sales teams and our sales conditions. So that will provide some also improvements on our collections and returns that will benefit our cash flow.

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Juan Moreyra Marrou, Alicorp S.A.A. - CFO [16]

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And regarding the working capital, we're definitely achieving some better results in there. As you can see in the annex of the presentation, the cash conversion cycle at this point combined is around 37 days. We are projecting that number to be reduced for about 1 or 2 days towards year-end. And for the following year, [reduction of] 1 or 2 more days.

Regarding Intradevco specifically, for next year, we are planning a reduction of about 5 days to what we see this year. So the reason why the number is going to be reduced only 2 days for the combined company is because Intradevco's share within the consolidated number is not that big. But we are definitely working in many different efforts to improve the working capital in Intradevco.

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Operator [17]

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(Operator Instructions) And you do have a follow-up question from Felipe Ucros with Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Alfredo, if I can do a follow-up on consumption in Peru. You've, obviously, on the organic side, seen a little bit of a deceleration. I think you're growing around the 5% level early in the year, and now it's slowed down to 1%. And obviously, it has to do with the macro. But I wanted to ask you what you expect for the rest of the year. Do you feel like it has touched a bottom and in the last few months you've seen some stability or some rebound in consumption? Or is it still declining -- or decelerating, I should say?

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Patricio David Jaramillo Saá, Alicorp S.A.A. - VP of Consumer Goods - Peru Division [19]

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Thank you, Felipe. This is Patricio. Thank you for the question. It is really hard to say because the majority of the quarter was not fully impacted by the latest political tensions that are reducing consumer confidence that actually started in late July and the beginning of August, perhaps.

So if we take a look at our recent closing, I would say, still there's a lot of pessimism within the market in terms of what will happen next. We are in the process of changing weather cycles here in Peru, and that will start to favor other types of categories such as refreshment beverages and other type of Christmas categories such as panettone. We had a very good start within panettones when compared to last year.

So that could give us a little bit of indication perhaps that the market is starting to recover. But when we just take a look at Kantar, which provides us with market leaders in terms of overall consumption, latest results out of the July-August numbers came in flat, whereas before, we were slightly growing almost 1%.

So I would say there are mixed signs within the market. We are hopeful that this Christmas season will start to recover in several categories that we are participating on. Panettone is one of them. Canned tuna is another one. Edible oils is something that also is significantly up during this Christmas season given the fact that it's part of what companies and many other type of employers give out to their employees during the season.

So to be honest with you, I think that it's mixed in terms of market signals. We are hopeful that this will continue to recover or start to recover, but we've not yet seen many signs that this will happen.

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Operator [20]

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And there are no further questions at this time. I'd like to turn the call back to Mr. Perez for any closing remarks.

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

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Well, thank you very much, everybody, for participating on the call. As always, if there are any additional inquiries, detailed questions, please don't hesitate to call our Investor Relations team. We're more than happy to answer them. Thank you again, and I'll talk to you again after the year-end really. Have a great day. Bye-bye.

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Operator [22]

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And this concludes today's call. Thank you for your participation. You may now disconnect.