Alicorp S.A.A. (ALICORC1) Earnings Call Transcript & Summary

Excuse me, everyone. We now have all of our speakers in conference. [Operator Instructions] At the conclusion of today's presentation, we will open the floor for questions. Instructions for asking audio questions will be given at that time. [Operator Instructions]. I would now like to turn the conference over to Gisele Remy, Director of Productivity and IRO. Ms. Remy, you may now begin.

Thank you, and Good morning, everyone. We are very pleased that you could join us today. I am Gisele Remy, Managing Director of Productivity and IRO at Alicorp. As presenters today, we will have Mr. Alfredo Perez, Chief Executive Officer; Mr. Juan Moreyra, Chief Financial Officer; Mr. Patricio Jaramillo, Vice President of Consumer Goods; and other members of the management team who will join us during the Q&A session. Today, we will be discussing the third quarter 2021 results after the financial results and earnings reports we issued yesterday. If you have not yet received a copy of the earnings report, please visit www.alicorp.com.pe, where you will also find the webcast presentation to accompany our discussion during this call. 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 the 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 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 you 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.

Thank you, Gisele, and Good morning, everyone, and thank you for joining us today for Alicorp's Third Quarter 2021 Earnings Call. First of all, I would like to thank once again all of our workers that continue navigating through this difficult time, assuring the availability of special products in all of our geographies where we operate. We're still committed to your safety, and we'll maintain the strictest protocols. Also thank you everyone who joined us today, with you and your families are staying safe and healthy. I'd like to start today by giving you an overview of the key events of the quarter, followed by an update on some of our strategic initiatives and our consolidated results. After that, Patricio and Juan will cover our financial results by business unit. At the end, before the Q&A section, I will take the floor again to give an update on our ongoing view forward and our guidance as well. So moving to Slide 5 to cover our recent relevant events. First, Negrita, a brand with more than 60 years in the Peruvian market, took a different path. The path that represents the confident team [indiscernible] commitment and the business. Today, Negrita is [indiscernible], a brand the aims to build the better country and highlight the diversity that represents us and makes all Peruvians proud. Second, we continued moving forward in our SAP S/4HANA migration. And in this quarter, we had successful implementation in our subsidiaries of Intradevco, RP, Aquafeed Ecuador and Peru, Consumer Goods Ecuador and Colombia and [indiscernible]. We see that this implementation as an opportunity to keep efficiencies and improve our operational process. Moving on to the sanitary situation, in Peru, COVID-19 related death are at the lowest level since March 2020. This is explained by the acceleration of the vaccination campaign developed during the last month, reaching over 56% of population with at least one dose and over 45% completely vaccinated. In our other most important geographies, COVID-19 cases have also seen a significant reduction in recent months, which have partially encouraged economic reactivation. Now we move on to Slide 6, to give you an update of the global inflationary phenomenon, which is representing an important challenge across our supply chain. Inflation is now one of the main challenges that companies are facing globally across the supply chain. Prices of agricultural commodities continue to experience significant price increase with soybean oil having increased 108% and wheat 84% since June 2020. The increases in the price of oil have also been significant, 103% since June 2020, translating into higher cost of packaging, transportation and freight costs. Moreover, we have also seen a significant increase in energy costs. An additional factor that contributes to the margin pressures consumer goods companies are experiencing around the world is a depreciation of local currencies against the U.S. dollars. All the aforementioned factors are external and cyclical. I will simply represent pressures for companies around the world in the coming quarters. Let's move on to Slide 7, to discuss the difficulty around economic conditions in the main regions where we operate. The COVID-19 pandemic has represented the greatest impact in an economic terms that for all [indiscernible] that we have faced in decades, causing an increase in the unemployment rate and a reduction in household purchasing power, reflecting in the presence of more affordable brand. In our main geographies, GDP recoveries are estimated for 2021, but mainly due to the base effects of 2020. The most [indiscernible] is Peru with an 11.5% recovery in the international production, offsetting the 11.1% decrease of the previous year. In the cases of Bolivia and Ecuador, we can see the growth estimates for this year does not fully compensate for the contraction of those economies. However, for 2022, a significant slowdown is expected, reflecting the challenging international conditions for the region. Regarding the political outlook of Peru, the most relevant event for this quarter are the confirmation of Julio Velarde as President of the Central Bank for an additional period of 5 years. And also, the replacement of the Prime Minister Guido Bellido with Mirtha Vasquez, a former President of Peruvian Congress and a member of a modern left-wing Broad Front Party. These announcements were perceived positively by financial market. Let's move on to Slide 8, which covers different aspects of our latest transaction in which Alicorp successfully sold a Pastificio Santa Amalia to Camil Alimentos on October 29 after the approval of local authorities and successfully completed the sale of our Brazilian subsidiary to Camil, the leading consumer goods company in Brazil. We are very happy to know that the company acquiring Santa Amalia sees our subsidiaries has a great opportunity to diversify portfolio, to strengthen its presence in the [indiscernible] region and also open new opportunities for Santa Amalia and its people. The transaction with an enterprise value of BRL 410 million is aligned with the strategic goal of focusing our growth strategy in the Andean region. Now our third quarter 2021 financial statement in strict compliance with accounting standards, our Brazilian assets are classified as available for sale, and the results are reported in the net result on discontinued operations slide. For the fourth quarter 2021, the following impact for the sales transactions are estimated, a PEN 28 million loss in the sales transaction and PEN 125 million sales loss which is noncash impact from the reclassification of the accumulated translation loss currently reflected in the company's book equity to the net income from discontinued operations. This reclassification is therefore useful to book equity. Let's now discuss our consolidated result for the third quarter of 2021 on Slide 10. Consolidated revenue grew 37%, while volume increased 5% year over date in the third quarter of 2021, mainly driven by the solid performance of our Aquafeed and crushing businesses alongside with Consumer Goods International. This was partially offset by a reduction in our Consumer Goods Peru unit, impacted by the reduction of volume and tiering down, including an inflated base effect versus third quarter 2020 when volumes recovered considerably after production disruptions in the second quarter of 2020 related to COVID-19. On a year-to-date basis, revenue increased 27% year-over-year and volume 6%, reflecting higher revenue in all our business units and volume recovery in our B2B, Aquafeed and crushing units. Moving on to profitability, let's now review our consolidated EBITDA for the third quarter of 2021 on Slide #11. Consolidated EBITDA exhibits a slight increase for the quarter compared to 2020, mainly explain the strong performance of our crushing, Aquafeed and B2B businesses. Excluding the crushing business, EBITDA fell 13%, explained by continuous pressure from the increase in international commodity prices, which significantly affected the profitability of our Consumer Goods Peru and Consumer Goods International units. Year-to-date EBITDA increased 12% year-on-year, boosted by the remarkable recovery of our B2B and Aquafeed units and a solid growth of our crushing unit. Let's now review our consolidated net income for the third quarter 2021 on Slide #12. Net income fell 37% year-over-year, explained by lower operating profit in addition to higher net financial expenses due to higher working capital requirements across the businesses units, but mostly from our crushing operation. On a year-to-date basis, net income increased 11% due to low base impacted by nonrecurring COVID-19 related expenses and costs. Now let me pass the floor over to Patricio, who will discuss the operating results of our CGP and CGI businesses.

Thank you, Alfredo. Let's begin with an update on CGP market dynamics on Slide 14. This third quarter 2021, Peru's GDP is expected to grow 5.8% versus last year, maintaining a growing trend when compared to our low 2020 that was severely hit by the COVID-19 pandemic. Country continues implementing a nationwide vaccination program with more than 12 million doses administered with curfews and other restrictions [ starting ] across the country. Nevertheless, the political uncertainty continue during the quarter with a volatile exchange rate, increased inflation levels and decreased consumer confidence and investment levels. Regarding consumption trends, we see a market contraction during the last 2 or 3 bimesters in several of our categories, especially in foods, such as cookies, canned tuna, edible oils, pasta and bleach. As more and more restrictions are being lifted, households return to more normal habits regarding eating and cleaning. Out-of-home consumption is also reigniting with restaurant GDP growing 40% from the July 2021, as more and more Peruvians are returning to work. We are gaining or maintaining our market shares in 67% of our categories in value and 64% in volume in the year-to-date when compared to last year. However, we are also losing shares in categories where we have led pricing actions to offset cost pressures, such as edible oils, pastas, cookies and detergents. In these categories, our price index versus key competitors have shifted, driving us temporarily of strategy and resulting in volume declines due to higher-than-expected volume elasticity. Now let's turn to Slide 15 to talk about our new program we have launched to regain market competitiveness. In August, we launched a new program called Marcas a tu lado. This initiative offers Peruvian families high-quality products at very competitive prices in 10 different categories with 13 product alternatives. The Marcas a tu lado program will focus on 4 key pillars: First, achieving parity pricing versus key competitors in value categories. Second, increased distribution of participating brands nationwide. Third, maximizing production output of these brands across our manufacturing network. And number 4, mass communication to increase program awareness along with the public with public relations program being deployed. We believe that with this initiative, we will be able to regain our lost market share in those categories mentioned before, while also continuing to benefit from our scale in our manufacturing and distribution network. Now let's move on to the performance of our Consumer Goods Peru unit on Slide 16. Third quarter revenue decreased 7% year-over-year with gross margins at 26.1%, down 6.7 percentage points versus last year due to higher commodity costs and a volatile exchange rate. As mentioned earlier on the call, year-over-year raw material prices have risen dramatically in categories such as edible oils, pasta, biscuits, flour and sauces have been largely affected. It is also important to mention that the base effect given that the third quarter of 2020, as Alfredo mentioned, was our highest quarter last year as we reignited our production capacity and trade inventory levels after the production shortfall we had during the second quarter of 2020 due to the limited volume sold as a result of COVID-19. For the year-to-date, revenue is 7% up, our shortfalls in this quarter were offset by growth in the first and second quarter. Year-to-date gross profit decreased 8% versus last year, while gross margin lost 4.8 percentage points due to lower volume, higher costs and devaluation of the Peruvian sol. Year-to-date EBITDA is down 19% versus last year due to the lower gross margin and impact from increased marketing expenses and SG&A up 11% versus last year. Let's move on to Slide #17, Consumer Goods International market dynamics. Regarding Consumer Goods International, the landscape is shaped by a harsh economic environment marked by rising costs in raw material and logistics that continue to put pressures on our margins. In this context, only Ecuador stands out for progress made in the vaccination program and by sending signals that it will be lowering its tax pressure. Also President Lasso is converging efforts to increase petroleum output through foreign investments. In Bolivia, smuggling entering from Argentina continues to negatively impact local, domestic, oil sales and prices. On the other hand, low confidence on vaccine efficiency sustains pandemic personal care and household cleaning habits. Meanwhile, Argentina is going through political turmoil as the governing party lost midterm primary elections and is now strengthening price controls, implementing a 90-day freeze or more than 1,400 consumer product goods and SKUs. On Slide #18, we will cover CGI quarter 3 2021 performance. Despite the challenging economic and political context, revenue in Consumer Goods International increased 21% year-over-year, driven by the recovery of volume sales and specific pricing initiatives deployed. However, while it was possible to keep the volume aligned to last year's third quarter, pricing actions were not enough to fully offset the impact of higher costs. In Bolivia, revenue increased 11% year-over-year, explained by market share gains and specific pricing actions taken. Despite the regulatory context of domestic oil prices, various initiatives are being implemented to maximize sales across all platforms. In Argentina, despite the 50% increase in revenue, macroeconomic headwinds, the contraction of local consumption, price controls, inflation and the devaluation of the Argentine peso have had a significant negative impact in the performance of our consumer goods unit. Ecuador maintains solid revenue growth of 11%, fueled by positive market share in pastas, up 1.4 percentage points in the year-to-date versus 2020 and mayonnaise up 2 percentage points also versus last year. EBITDA for our consolidated Consumer Goods International unit reached PEN 7 million. The largest impact behind this year-over-year decline is driven by Bolivia's result, which are down PEN 20.5 million, with margins heavily impacted by the impossibility of making price adjustments in the magnitude of cost growth, tiering down and the impact of smuggling. However, given that most competitors in the edible oil markets are vertically integrated, it is worth noting that EBITDA growth in our crushing units, which we will cover later in the call, more than compensates EBITDA losses in Consumer Goods Bolivia. In Argentina, EBITDA decreased PEN 13 million versus the third quarter of 2020. As mentioned before, government-imposed pricing restrictions have resulted in continued margin dilution as we are unable to offset inflation and devaluation. Finally, our export business has also suffered volume losses versus last year as pricing actions aimed to recover lower margins in pastas in Chile and edible oils in Colombia impacted demand. As we have discussed, the impact of margins due to the increase in raw materials has deeply affected results of our international business as well. Therefore, we are strengthening efforts to launch high value added innovation, implement new pricing initiatives across other geographies, deploy efficiency programs and seize rightsizing opportunities in order to maximize profitability. Now let me pass the floor over to Juan, who will discuss the operating results of the rest of our business units.

Thank you, Patricio. Let's move to Slide 19, B2B update on market dynamics. The restaurant industry continues to recover operating at close to 80% of pre-pandemic levels as restrictions are loosened and the consumers resume out-of-home activities. Our food service platform outperforms Peruvian restaurant's GDP and exceed 2019 revenues. This has been achieved, thanks to our brand equity, our strong relation with existing customers and our successful new client prospection. Using pre-COVID as a base, our B2B business reached 7% higher sales volume and 18% higher gross profit. However, also in the case of our B2B business unit, consumers are looking for more value products, significantly accelerating tiering down in most of our categories, such as edible oils, lard and flour. On the positive side, we do see share gains since our multi-tier strategy, strong brands and service level, which includes our technical assistance, allow us to be in our clients' preference. Let's move on to Slide 20, B2B Q3 2021 performance. Revenue grew 46% this quarter on a year-over-year basis due to market recovery, client prospection and price increases and as compensated for higher cost of commodities, industrial inputs and logistics as well as an impact from the devaluation of the Peruvian sol. Our food service platform showed a growth of 58% year-over-year and our bakery platform 33%, improving our category mix. Moreover, our pricing strategy balances market competitiveness and margin protection. Regarding gross margin, B2B showed an increase of 1.1 percentage point year-over-year due to efforts performed on the top line to offset higher production cost and volume recovery. EBITDA increased 2.1x against the third quarter of 2020 with a 3.6 percentage point of EBITDA margin gain despite cost pressure due to scale gains. On a year-to-date basis, results are very remarkable as well, with 40% revenue growth and EBITDA multiplying 2.4x. Next, on to Slide 21, we will cover the Aquafeed market dynamics. In Ecuador, shrimp exports continue to grow, and China and partially recovered share within the export mix compared to the first half of the year. In addition to the robust recovery of the Chinese market, also the U.S. and European markets maintained their positive trend, posting 52% and 26% growth year-on-year on a year-to-date basis, taping a more balanced and diverse Ecuadorian shrimp go-to-market strategy. To fulfill the demand from the U.S. and European clients, Ecuadorian exporters have increased their offer of value added and headless shell on products, which are preferred in these markets. As a result of this change in the product offering, the data shows a lower increase in exports than in production when compared to previous years. Nevertheless, we estimate that although exports have grown 21% year-to-date September 2021, shrimp production has increased by an impressive 29% in the same comparison period. These numbers have surpassed all initial growth estimations for Ecuadorian shrimp and demonstrated the potential and importance of this market. International trade for shrimp is improving and building a strong path to recovery. Demand, especially from the U.S., has surged in recent months. Also, we are seeing increasing signs of recovery from China and Europe. This positive demand scenario, together with COVID related issues and global supply chain problems have caused an increase in shrimp prices. By the end of the third quarter 2021 price are above pre-pandemic levels and the outlook is stable. Thanks to these new market dynamics, Ecuadorian shrimp farmers are optimistic about the future results and are first increasing pond shrimp densities, which also increases the demand for [ fee ]; second, investing even more in automation and new technologies, which include Vitapro's new digital ecosystem. Third, slowly tiering up towards more premium diets, where Vitapro is a market leader. And fourth, acquiring new land and improving industrial facilities in order to better cope with growing demand from the U.S. and Europe. Regarding the salmon feed business, export of salmon from Chile dropped in the second quarter 2021 by 10% compared to the second quarter of last year and are expected to keep falling throughout the year due to reduced fry and small stockings from 2020. As with shrimp, the recovery of demand for salmon, especially from the U.S. but also from other main import regions has been significant, mainly due to higher out-of-home consumption and increased retail sales. Due to this initial demand recovery and expectation of lower exported volume from Chile for 2021, prices in the salmon market have bounced back to above pre-pandemic levels. This increase in prices has incentivized farmers to rapidly start stocking, and we expect higher export volume for 2022. To compensate successfully, Vitapro is continuing to deploy a differential go-to-market strategy supported by the new experimental centers, agile services, complete product portfolio and PatagonIA, our advanced analytical tool. Let's move on to Slide 22, Aquafeed performance. In terms of business performance, the 85% revenue growth year-over-year is mainly explained by, first, an increase in volumes in both of our feed business units due to a recovery in our main platform and to a lesser extent to our presale executed before our self-implementation. And second, by price initiatives introduced to compensate for the increase in our raw material prices. Gross margin decreased 2.1 percentage point year-over-year due to a change in our portfolio mix and price increases in our raw materials. EBITDA increased 90.4% year-over-year, mainly due to an increase in volume. The EBITDA margin increased by 0.4 percentage point, also due to the increase in volume, which contributed to the dilution of SG&A expenses. Finally, let's move on to Slide 23, Crushing Q3 2021 performance. The Crushing business had a notable quarter, mainly explained by the positive effect of price increases in raw materials and higher production of soybeans in Bolivia, in which Alicorp had a record share of 37%. Revenues increased 58% year-on-year in U.S. dollars, explained by higher prices. Volume sold to third-parties fell slightly by 3% due to higher internal consumption and a delay in shipments in September because of bottlenecks at ports. As you know, the results we report in our financial statements come from the sale to third parties. However, we would like to highlight that crushed volume reached 320,000 metric tons, growing 23% year-over-year. This is an outstanding result, product of a greater harvest, in which we had a record share, a powerful approach to producers with a differentiated value proposition and an outstanding team performance. EBITDA increased 2.4x year-on-year for the quarter and 4.6x year-to-date due to higher prices and volume. On a year-to-date basis revenue increased by a remarkable 71% while EBITDA multiplied 4.6x. The business continues to focus on its strategic priorities, such as optimization of working capital and following best practices by farmers that aim to promote effective farming practices. Moreover, our new product line of agricultural supplies showed an impressive 104% year-over-year revenue growth. Next, we will discuss our liquidity indicators and our strong balance sheet on Slide #25. Regarding our debt metrics for the third quarter of 2021, our net to EBITDA ratio increased to 3x and from 2.7x as of the second quarter of 2021. This increase was mainly explained by higher working capital mix from growth in raw material inventories and higher prices and the extraordinary dividend payment made in September. The current increase in leverage is expected to be partially offset once we receive the proceeds from the sale of our Brazilian subsidiary by yearend. Let's move on to Slide 26, please. Regarding our liquidity level, as of September '21, we successfully closed a syndicated medium term facility for $200 million with a group of foreign banks to refinance the short-term debt acquired to finance working capital mix. To date, we have only withdrawn $130 million, and the rest remains as a committed facility. One of our top priorities is to have an effective working capital management. Over the last 12 months, our cash conversion cycle average 17 days. Although this represents 2 more days than the last quarter, it also shows a 2 day improvement compared to the same period of last year. The increase in this quarter is mainly explained by higher inventory in our crushing business due to a combination of a better harvest and higher commodity prices. Regarding solvency, as of September, our cash balance represents 1.5x the principle of debt maturity over the next 12 months. Moreover, and to further boost liquidity, we have committed credit lines in the amount of PEN 290 million, ready to be disbursed, mainly maintain, available and committed credit lines for more than PEN 4 billion and have room to issue debt securities in the Peruvian market under our local bond programs for PEN 1.6 billion. Our comprehensive and prudent financial strategy has been recognized not only by local rating agencies, which maintain us in the highest possible rating in Peru, but also by all 3 global rating agencies, which have reaffirmed our investment-grade rating with a stable outlook. It is also worth mentioning that we've engaged a second rating agency for our local securities in Bolivia, in the Bolivian market that will allow us to increase our presence in that market. Now let me please cycle back to Alfredo for final comments.

Thank you, Juan. And now let's turn to Slide 28 to share with you our multi-annual efficiency program. In the last months, we have faced diverse external impacts like the inflationary pressures along our value chain and a depreciation of local currencies, coupled with a deterioration of economic conditions in our main geographies, which represent a challenge and will remain a reality for the coming quarters at least. Given the current pressure we experience on gross margin, we need to adapt to the situation. Therefore, we'd like to share with you that we are gearing up our efficiency efforts significantly and working on a multi-annual efficiency program with a target of more than PEN 200 million in run rate savings by 2023. As you can see through our program, it's made up with several different initiatives across revenue, COGS and SG&A. COGS and expenditures will be prioritized, simplified and optimized through different initiatives such as pricing and promotions, lean manufacturing, design-to-value and SKU rationalization. Moreover on the SG&A front, we're working on the review of our go-to-market strategy and an ambitious overhead reduction program and the maximization of our SAP S/4HANA investment. Next, let's move on to Slide 29 to wrap up today's presentation with a glimpse of what we expect for our full year results. In terms of revenue growth, we maintain our previous guidance, expecting consolidated revenue to grow double digit for the full year. Furthermore, we continue to expect all of our business units to grow double digit, except for Consumer Goods International unit, which should post high single-digit growth. Regarding EBITDA, we are just downward our previous guidance of approximately 20% growth year-over-year to double-digit consolidated EBITDA growth. As for our investments for the year, we slightly adjust our previous guidance of CapEx of around $140 million to approximately $130 million, as we continue to analyze our investment plan in the context of higher uncertainty and lower investments in the first 2 quarters. Before we end our call, I would like to share with you that Juan has decided to leave our company to pursue new career opportunities. We will miss Juan, my sincere thank you for these years of valuable contribution to our company, leadership to our people and also for our friendship. We'll also like to use this opportunity to present Manuel Romero who has been appointed as our new CFO and will take charge in January 2021. Juan will stay with him until year-end to ensure a smooth transition. Manuel will now share a few words with our audience.

Thanks, Alfredo. Good morning, everyone. I wanted to thank Juan for the support and guidance since I joined Alicorp and in this transition period. I'm really excited and honored to continue working with such an outstanding and experienced. I also wanted to think Alfredo for your trust and opportunity to lead the finance team. Over the next few months, we will organize some meetings with investors and coverage analysts. I'm really looking forward to meeting all of you. Thank you, and let me pass it back to Alfredo for closing remarks.

Thanks, Manuel. And thank you, obviously, everyone, for joining us today. And now we welcome any questions you might have. So we're opening up the lines.

[Operator Instructions] And our first question comes Felipe Ucros from Scotiabank.

A couple on my end. Maybe you can start with the positive with aquaculture. Very good results, but it also seems that you had some pre-sales ahead of the SAP S/4HANA migration. Can you quantify how much of this 66% surge in volumes was preorders versus how much was the pure reactivation in the business? And you also mentioned that you are finally seeing some up-tiering, which is great news. I'm just wondering if you can expand on this. And then maybe I can do a follow-up on the GDP.

Great, Felipe. Thank you very much. I'll make a very quick comment and I'll pass it over to Hugo, who runs our Vitapro business unit. Regarding the growth in our business, it's a very healthy growth, mostly explained by market dynamics and the demand side from all of the destination markets for the Ecuadorian shrimp mostly. So you're talking about not only China, but wholesale, the U.S. and in Europe. There are some volumes associated with the presales for the SAP implementation, but that is not as material. But I'll let Hugo comment on that. And I'll just also allow him to comment on the second part of your question as well. So please Hugo, go ahead.

Thank you, Alfredo, and thank you for the question. The preorders in the last month we have represent a really long week of our sales over the next month. It's about 25% of a month. That's what the order of our presale. Regarding to the up-tiering of our portfolio, we are working with farmers to offer new products with a better prices of the shrimp, they demand more products in order to increase the density of their land. So in this order we could serve more value products, increasing the margin of ourselves.

Okay. That's very good color. And maybe if I can have a follow-up on Consumer Goods Peru. You're probably the first food and bev company in our universe, which has had troubles increasing prices this quarter or, let's say, over the last few months. Can you talk a little bit about the root causes of this? Obviously, there's a little bit of the political backdrop in Peru. But also wondering how much social media has been a problem? And maybe if you could talk a little bit about how you can drive the point to consumers that price increases are the result of raw materials and FX rather than greed or something else, which seems what you see on a lot of posts on social media and striking a balance with Marcas a tu lado. Just hoping you could expand on that a little bit.

Thank you, Felipe. And I'll just pass it on to Patricio, who is with us on the call who can actually dig deep into both of your questions or actually side question as well. Go ahead, Patricio.

Thank you, Alfredo, thank you, Felipe. Yes. The biggest impact that we're facing during the quarter is definitely to the factors that we discussed before, which is the higher commodity prices that we are facing. And as we explained during the call, we have predominantly led price taking in many of the categories throughout the year. However, there's also a limit to what consumers can really accept in terms of price increases. For example, edible oils, if you take a look at where we were last year, end of last year and how much pricing we have increased, it's almost 50%, 60%, close to 70% price increases in our context or, let's say, in an economic environment, which is not really favorable to Peru nowadays. So we are -- we are taking prices. Otherwise, the effect on our gross margins would be even more to what we have today. But there's also a limit to what consumers can actually accept. And there's also, as I said before, and we mentioned during the call, tiering down, which is also affecting our margins. As prices continue to rise, consumers are looking for more and more, I would say affordable solutions or alternatives to the everyday product consumptions. And that's where a program such as Marcas a tu lado comes into effect with great positivity, not only in terms of offsetting the negative effects of higher prices that has -- that the company has obviously suffered, but also in a way of being next to consumers at these type of needs where they're seeing consumers being or prices being increased in many food and staple products, not only in packaged goods, but also in terms of their natural resources, gas, oil prices. So if you take a look, for example, at inflation here in Peru, the government target a 3% inflation rate for 2021. And now on a year-to-date basis close to 5%. So it's significant. I think that we continue to monitor our for pricing scenario to see what other prices we can continue to take, and we'll continue to do so. But there's -- as I said before, a limit to what we could do in terms of what can consumers afford at this particular point in time.

That obviously makes sense. I don't know if you guys monitor sentiment on social media. But have you seen any improvement on that front?

Yes, we have, Felipe. As a matter of fact, we did. I think that there's a lot of -- we deployed along with Marcas a tu lado program in terms of really, I would say, giving consumers an alternative in terms of what products can they buy at affordable prices. There was also sensitivity in terms of communicating in several media outlets and also social media and with key opinion leaders that prices that we have taken throughout the year have been driven by commodity price increases. And that we have even suffered on margins because we have not taken full price in terms of what commodities have pressured us to take. So the sentiment at one point was very negative, especially since we led those price increases, as we had mentioned before. But nowadays, it's more positive. And Marcas a tu lado, I would say, has been a program with tremendous positive effect, not only in terms of trying to recover the volume scales that we had in the past, but also in positiveness towards the company or the reduced negativism that we had at one particular point in time during the quarter.

And that's very evident in all the efforts that I've seen from you guys on different social media. Congrats, guys, and I'll leave it there. Thank you.

Thank you, Felipe.

Your next question comes from Alonso Aramburu with BTG.

Yes, I guess, following up on Felipe's question, I mean, it seems that there's not a lot of space for more pricing action in Peru at least. And I think some of the competitors were not being as aggressive as you were in recent months. Can you comment a little bit on competition and what some of these competitors and your main categories are doing? And if there's maybe some -- if they move, maybe some more space for pricing action? And then also related to that, on the cost side and your hedging, I mean, how are you seeing cost? Do you think you are at the peak of your cost in this cycle? Or do you expect cost to continue giving you some pressure in the months ahead?

Thank you, Alonso. So for the first question, I'll ask Patricio to share. Your point is correct. In terms of competitive dynamics across categories vary depending on who the competition is. But I think what Patricio confirmed is the fact that we have been leading price increases, and obviously, competition has been following not as closely as expected. But he will build on that. And then on the second part on cost, mostly because of the impact of raw material, I'll ask Luis Estrada who is also on the call to comment on that and also provide some views, at least that we have with all the uncertainty that that view entails. Go ahead, Patricio.

Thank you, Alfredo and thank you, Alonso, for the question. I think that it's important to mention that even though we had led price increases in many of the categories that we mentioned before, we are also continuing to gain shares in most of them. So as I said during the call, we are gaining shares or at least maintaining shares versus 2020 in more than 65% of the total categories that we participate on. I would say that the more sensitive categories to price increases in terms of lost volume elasticity have been the ones that are more close to consumers in terms of price sensitivity, such as edible oils, some laundry soap, pastas definitely that have been affected by wheat. So even though we're leading prices, we continue to maintain, I would say, our share presence in many of those categories. As I said, as we mentioned before, there's still, as cost pressure continues to rise. And in some cases, devaluation also continues to pressure our cost. I would say that we will continue to take as much price opportunities that we can see in the foreseeable future. However, as I said before also, this is limited to what consumers can actually pay nowadays within the current economic scenario that Peru is facing. There's also, I would say, this some sort of economic uncertainty and political uncertainty is also limiting our clients of making additional business deals with many of the companies. And our competitors, I would say, have been focused a little bit more on volume than they have been on profit, and they have seen our price increases, and they continue to follow. However, they are following, I would say, at a lesser pace to what we initially had at the beginning. So they are continuing to follow, but I would say we have led many of those price increases during this past year. And certainly, as you lead those price increases, volumes continue to suffer or will suffer at the beginning, but they'll start to recover, I would say, towards the end. Also one thing that is very important to mention during this particular quarter is that we have seen market start to decline over the last, I would say, 2 to 3 bimesters. And they are actually returning to pre-pandemic levels in 2019. So we are hopeful that those markets will continue to be at the aggressive consumption level that we had during 2020. But the reality is that some of them, the most important ones are actually already started to decline and reaching those 2019 numbers. So that is also something that will affect our results or that is affecting our results, especially in volume when compared to 2020. As we said also before, our last -- our third quarter 2020 was the one in which we recovered our inventory levels. We regained our production output, especially in Lima, in our manufacturing plants. So it was already a very high base to compare this quarter against.

Thank you, Patricio. Luis, if you can just join us for answering the second question that Alonso posted on cost pressures.

Sure, Alfredo. Thank you, Alonso, for the question. We expect a lot of continuable activity, as we mentioned, Alonso, on the last quarter call, on the markets. And let me give you a couple of comments on the major commodities that we purchase and we manage risk. On wheat, Canada is an important origin for the region and particularly for Peru. And given the extreme warm summer that the Northern Hemisphere experienced, it's estimated that about 30% to 40% of the production of wheat in Canada has been impacted. So that is putting pressure on wheat. And our view is that that is going to put a lot of pressure on wheat for the next 6 to 8 months. That could be offset to some extent, not to the same extent because these are different types of quality. But it could be offset to some extent over the coming crop in Argentina that we will experience in our Southern Hemisphere summer. So that's what's putting pressure on wheat and we believe we will continue to put pressure on wheat and bring volatility. If we look at the other commodities that we purchased that are linked to oils and vegetable oils in general, I would say that there are 2 aspects and elements that we're monitoring, one, and they're putting pressure to the markets. One is the renewable diesel demand that is coming strong, given the mandates on the states of California and Oregon that are putting a lot of impact on vegetable oil in the U.S. and therefore impacting the futures market. That's one element. The other element, it's on the energy side, Alonso, if you look at the inventories that usually, Europe should start building, given the fact that winter is approaching, those inventory levels are below average, yes. And that is also putting pressure on energy and you know, energy therefore puts pressure on the veg oil given the fact that bio-diesels and ethanol, it's one of the variables on the energy market in general. What can offset that pressure on oils is going to be, again, in the same token as we explained on wheat, the coming South America harvests on soybeans that we will experience in our Southern Hemisphere summers, on both Brazil and Argentina. It is expected that Brazil will have a record crop. However, that is not going to be enough to offset the higher demand that we're seeing in the world. And in the case of Argentina, we're beginning that phase where weather is very relevant to monitor how big is going to be that crop of beans in Argentina. Argentina, in particularly is very important to us because it's the main exporter of soybean meal, so that is relevant to the [ FFA ] business. And it is the main origin for us on veg oil as especially on soybean oil and sunflower oil for our refining business in Peru.

Thank you, Luis. I think, Alonso, as you heard from Luis' comment, basically overall, for the company's exposure to different commodities, we don't see in the next coming months, pressure that would help soften or actually reduce prices. So we're getting ready to face this environment for a few more quarters and that is part of the reason why we're pushing hard on the efficiency program that I highlighted a few moments ago, given the pressure that will continue to -- we expect to continue to face from a gross margin standpoint.

[Operator Instructions] Our next question comes from Andres Soto from Santander.

I have 2 questions actually related to the strategies that you have announced this quarter, one. And what is the impact of those strategies when we look into your margins, especially in 2022? First, regarding Marcas a tu lado, I understand the main purpose of this strategy is to regain market share, particularly in the value segment. So I would like to understand if you have any estimates for potential margin impact of this strategy. In the past, Alicorp has delivered very strong EBITDA margin in the Consumer Goods operations, 19%. Obviously, we are now in a different environment. There are temporary factors, but I assume they are going to -- some factors that are going to remain. So what should be the new normal for your Consumer Goods Peru unit in terms of the margins? And in line with that, I would like to understand regarding these efficiency initiatives that you guys estimate at PEN 200 million. If you have any timing for this to trickle into your consolidated results?

Thank you, Andres. On the first question, obviously, I will pass it on to Patricio to comment very quickly on the Marcas a tu lado strategy and impact. But before doing that, as you know well, this is a strategy that has helped us very much get back on track in terms of our volume platform for different categories. But it is at the very end, it is all being driven by what consumers are willing to pay. What we're seeing is obviously a consumer in the Peruvian market that has been affected by the different variables such as the pandemic, such as also the current environment that we are seeing in Peru, lower employment levels and things like that. At the very end, they're demanding more value-based products as economies progress over time, obviously, we expect that to turn around. But I will let Patricio to elaborate further on that, and then I'll come back with the answer on the efficiency front. Patricio?

Thank you, Alfredo, and thank you, Andres, for the question. Yes, the action plan for Marcas a tu lado was actually to achieve, as we said before, to regain our market share in many of the categories where we have seen a lot of cost pressure on price taking on our end, in which we have lost some market share. So it's basically to regain price parity versus our key competitors in those value categories. We also wanted to increase distribution of those participating brands across nation. We have seen that as we have moved prices in several of our core brands, clients have stopped doing businesses with Alicorp because obviously they have no demand for higher price products. Also, as we said before, we wanted to maximize the output and the production of these brands across our manufacturing network and try to regain some of the cost advantages that our scale has on that manufacturing and distribution network. And as I said to -- as we mentioned to Felipe earlier in the call, start mass communication to regain, I would say, the positive sentiment of Alicorp as a company, and that's obviously in light of price increases had some negative effect during the third quarter. The effect of Marcas a tu lado in terms of margins, I would say that for the next foreseeable future, margin expectation in light of those increasing raw materials costs, devaluation and also tiering down, will continue to pressure our cost margins in the future. And I think that as such, we will see a new normal perhaps in which our value brands usually represented close to 25%, 30% of our total volume sold. Nowadays, I would say that not only because of Marcas a tu lado, but because of the consistent efforts consumers are doing in buying value products versus more value-added or more high-priced products, we see that perhaps that mix will change somewhat during the next year or so. And this is entirely driven by the political and economic situation that Peru is going through alongside with the pressures from cost of raw materials. As we saw, I would say, earlier in the presentation, for example, in oils, the category has increased more than 60%, 70% in terms of prices. In terms of pastas, the category has increased more than 20% in terms of pricing as well, cookies, close to 40%. All this compared, I would say, to our first quarter in 2020. So it will have an impact. There's obviously a difference in terms of margins of our value-added high priced brands versus our value products. But our main effort here is to regain market competitiveness and as such also a positive sentiment of Alicorp as a company in this turbulent times.

Thank you, Patricio. And Andres, I think when you take a look at Peru nowadays, it's like a perfect storm. This year, the country was coming out, at the beginning, of a very tough COVID-19 pandemic. And it had a significant impact on consumers, employment levels, purchasing power. And actually that situation continued this year as well. On top of that, we have all of these dynamics, inflation going on around the globe, but mostly in food-related categories that we have, at length, explained on different commodities that we use as raw materials for our end products. And these are very basic consumer staples, obviously being demanded by our consumers. That is the second element. The other element that we see in Peru is, obviously, all the uncertainty related to the political environment that we are currently facing with one of the consequences being devaluation of the sol. So all of these elements are playing against the consumer for now. But obviously we'll see what happens in the coming months. We as a company, our strategy from a CPG standpoint has always been to be present in all tiers with different categories that we compete in. So when these situations happen, we have elements to attack the market. And therefore Marcas a tu lado is an example of that, a portfolio of brands that is particularly targeted to this type of environment. Now to your second question, which was on the efficiency front. As the situation, obviously, demand, given the pressures that we have been facing, and we expect to continue facing in the next coming quarters on the cost side, meaning put impression on our gross margin, mostly in Peru, as we explained, we need to act and act fast. That's why we're pushing hard on our efficiency program. We'll be targeting different lines within our business, from the revenue front with pricing and promotion initiatives, also on the cost side with different initiatives that we have experienced in the past on the procurement front, lead manufacturing, obviously, our route to market on the logistics front, different initiatives on the design-to-value side, the steering down a figure that we have had and obviously SKU rationalizations. On the SG&A front, we'll have different initiatives. One is we'll be reevaluating our go-to-market strategy and making it more efficient, given the current environment, as I said before. Then the second point is also the overhead reduction program. And finally the maximization of our SAP S4 implementation. A few of this will be more frontloaded in terms of the impact they will have in the reduction of expenses, for example, the overhead reduction program, some components of the design-to-value initiatives as well as the SKU rationalizations. But other programs will be more backend loaded given the structural changes that we'll have to commit in order to be able to achieve the efficiency. For example, when you take a look at our go-to-market, you're addressing how do we get our products to our clients and where the consumers buy as well. So that element will take a little bit longer, so that will be more the back-ended [ grand set ]. So in general terms, we are approaching more than PEN 200 million on this 2 year timeframe horizon. A few of the initiatives will be frontend loaded, as I said before, and a few others will be more backend loaded as well.

And just to summarize, based on this, the fact that margins this year have suffered mostly in the second part of it. Can we assume that the target for you guys is to keep the full year 2022 EBITDA margin in 2022?

On a margin levels, Andres, we have been commenting as our guidances, for this year, is double-digit growth. For next year, I think it's a little bit too early to tell. We are still taking a look at what the cost will be next year. Remember that in our categories, many of them that are -- for some commodity-based categories, what you have in fact is that the margin on percentage basis, it suffers when commodity prices are high and you need to translate that into price increases. As prices come down on the cost side, you will have the margin expansion that you are -- we all are very comfortable with. So for next year, it's a little bit earlier to tell. But we'll be commenting on that as we get closer to yearend.

We have one question submitted via the chat, and this comes from [ Diego Villalobos ]. What are your perspectives for the crushing business in 2022? And are you increasing capacity?

Thank you for the question, Diego. With us is Luis Estrada who runs our crushing business as well. Luis, Please go ahead.

Thank you, Alfredo, and thank you Diego, for the question. In terms of the perspective of the crushing business, as you know, it's quite related to the levels of commodity prices. And as we mentioned before, we expect both quite high volatility on commodity prices. But we also expect commodity prices to be on a platform level higher than 2018, 2019, more closer to what we have seen in 2021. So that should bring us opportunities, not to keep bringing solid results from the crushing business. With, again, I would like to emphasize, quite a bit of volatility on price. So we're going to have to be very sharp in terms of when to purchase the beans and sunflower seeds and also how to hedge it. And for that we have a team that is dedicated to that as well. In terms of capacity, we are -- given the fact that the production in Bolivia has been also improving in the last couple of years, we are reaching that level where we are maximizing capacity, and we are making an evaluation on whether there is a merit of increasing capacity and analyzing what the expected returns are investing on additional lines on crushing business, it's not a minor investment. And we have to be very cautious in terms of how quick that investment can be paid. There are other alternatives, Diego, to keep increasing and maintaining our shares and increasing the volumes as production in Bolivia continue to grow. And those alternatives are linked to the possibilities of doing some toll crushing, which we actually have already started piloting this year so that we can be preferred to have that as an alternative to investing on additional capacity. And we have that option already prepared because we, again, we did a pilot last year, and we continue doing the pilot this year and we're getting more comfortable with the option of toll crushing. Thank you for the question.

And we have no additional questions in queue at this time. I'd now like to turn the presentation back over to Alfredo Perez for closing remarks.

Well, thank you again for everybody for participating for second quarter 2021 conference call. As always, if you have any additional questions, please don't hesitate to contact us directly. And please stay safe and have a great day. Bye-bye.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.