Ebro Foods SA

MAD:EBRO

Earnings Call Transcript 2018-Q3

[Antonio Hernández Callejas, Chairman of the Board & CEO]

Good afternoon, ladies and gentlemen. Thank you very much for attending this meeting. What I'm going to do is just to introduce the first 9 months results for the year as well as the outlook -- I have a little bit of a husky voice because I was at board meeting talking for about 4 hours, so I lost my voice, and I apologize beforehand for that.So as I said, we are going to introduce the 2018 outlook and expectations. As you have seen throughout the year, we are undergoing a highly complex year, the most complicated year since I have chaired this company. We've been [ modeling ] these effects, bringing us to a year and closing expectation to be rather poor. Fortunately, it's been entirely [ tariff ]. Good thing that hasn't changed and remains very positive.As always, I will start with the first 9 months of 2018 with the Rice division. This year is proving complicated for our Rice division, especially in the North American business, for several reasons. The situation this year is very different compared to 2017, a year of volatile raw material and record results. Therefore, the result obtained in the year last year was at all-time high, much higher than the previous year, 2016. So we are comparing with an all-time high, really.In North America, on the other hand, there's a clear momentum of how it's heavily affecting us this year. First and foremost, raw materials inflation that has affected the different types of rice, on the one hand, the American varieties, the local harvest, and to a greater extent, the aromatic varieties where Riviana is the key market leader.Just to give you an idea, this is representing a cost of around -- of USD 38.6 million. And I'm telling you beforehand before you even ask me, okay? These are the costs of around USD 38.6 million for American Rice varieties as well as the aromatic varieties of the same volumes year-on-year. And secondly, because we have also experienced an uptick in logistics costs and auxiliary raw materials, packaging, among others, we're doing that right. And this is $6.7 million. Therefore, $38.6 million from rice and $6.7 million for packaging cost overruns that we need to try and pass onto consumers in different ways. That was point number one.Secondly, we've also suffered from production imbalances, partly due to the damage caused by Hurricane Harvey at our Freeport facility and partly due to lack of staff. Many employees have left to join industries that they consider more lucrative such as the chemical -- petrochemical industry. We are working on retaining and attracting new and existing staff by offering conditions that incur additional costs like extra hours, pay rises, among others. This is precisely what we've done this year. We have more than 220 employees in Freeport, and we've rarely had more than 140 and 150 on our payroll. We've been forced to offset these with very, very expensive extra hours in that area.I'll tell you a little later on what we've done in order to change this situation. On the other hand, because we've explained this on previous occasions, we have suffered a very sharp uptick in logistics costs due to rising transport, drivers and oil, and storage management costs that have affected us. Just to give you an idea for Rice, by $9.5 million, the biggest transport and storage costs for the same raw materials led to an increase of $9.5 million[Audio Gap]The problem we faced in Europe was that until March or April, it wasn't clear what the board was going to do, and it wasn't clear whether we were going to be able to plant in some harder parts of European Union, namely, in the Andalusian region of Spain, in Olvera, as well as Portugal. Thank goodness it rained in the end, and we've been able to have a normal harvest for the whole area. However, our farmers, at the end of 2017, had recently harvested. Forecasting this continuation of these drops, have been slightly reluctant to sell, and that led to a price uptick in a year where the quality of rice was lower than in 2017. We, however, have to make sure that we have sufficient curtailment for the year and -- because if there was no harvest in the southern part of Europe, we should have replaced it with third parties' raw materials that are usually with less quality and more expensive, especially with the Japonica rice variety. Also in Europe, there has been a production price increase for the microwave products because in the United States, I didn't mention this before, by the way, the launching of the microwave variety was very expensive. The learning curve took longer. It was more expensive than expected, and it's only now that we are [ -- we include ] tax inefficiencies that we had estimated back then that have to be replaced by sending microwave rice from Europe. And all of the plants are fully charged and working extensively and sometimes, obviously, are less efficient than others. In certain plants, we only work in a shift, and now we have to be forced to work in 3 shifts because our Memphis enlargement took longer than expected.In Thailand, [ a country ] of significant source of supplies for the group, which is also the place where we produce jasmine rice that was -- the one that was more expensive and had an impact of the U.S. P&L of $19 million to $38 million because of jasmine. And it coincided these raw materials increase, we're reluctant of the Bangkok facility. Therefore, we couldn't use the excess capacity and it is detrimental to the capacity we previously had because it was difficult to operate in a facility that was completely being refurbished. It's like being at home when you have the brick layers inside and you can't even use the whole floor. So it's just a simple example. And this is unfortunately what happened in a year where we would have loved to have much more capacity, but this is what happens, unfortunately.All these factors so far relate to costs, although there is also some good news in terms of profit, by the way. On the one hand, sales are upbeat. Brands are registering healthy growth in terms of volume and the improved product mix. We have considerable increases in microwave, aromatic and organic lines. And we also increased our market share across all markets despite having to restrict operations because of the lack of capacity, the necessary capacity in some of the products such as the microwave rice. We have to cancel some of the promos because of fears of not being able to have the goods at the relevant timing.In terms of raw materials, this $38 million, part of this has been automatically corrected because the harvest in the United States has finished and has been sold at similar prices to the ones in 2017. And we are taking the relevant measures in Bangkok, thus increasing our aromatic prices. The aromatic rice varieties prices have gone down but not as much as we experienced in 2017, which is the comparison year.In Europe, we haven't finished the harvest yet. The Italian and Spanish harvests have been sold at similar prices to the previous year, although the quality is much better. So we basically have maintained the price but with greater industrial output, and this is very good news going forward. With bad-quality rice, the cost of production is much more adjusted usually.In order to correct all of these imbalances and negative effects that have heavily impacted us in North America, we have rolled out several measures. In the Freeport facility, the one that we purchased when we took over SOS, we are adjusting our capacity in order to tackle the new situation, discontinuing less profitable businesses and redirecting production of our national rice to Memphis. This will help us to adjust and focus our acquisition, production and distribution resources on more profitable areas such as exports. The facility's port location, by the way, gives it a significant competitive advantage by the sea in terms of food service and parboiled products, for example. And basically, this is going to lead to a 50% decrease of our activity in Freeport, which will require, on the one hand, greater labor hand, which is going to be less than[Audio Gap]France, Germany, Italy. In the U.S., we've introduced Garofalo. It will grow below expectations in the U.S. However, we are below France's 40% positive year-on-year. Garofalo's results are very much in line with budget expectations. We are very pleased with the evolution of this brand. Once taking into consideration the advertising, we've reached an all-time high once again after the all-time high in 2017.The takeover of Bertagni enjoyed double-digit growth in the last quarter and has contributed EUR 5.9 million, which we expect this figure to rise to EUR 8.7 million by year-end. We're also very pleased with the work done by Bertagni, working to generate synergies with the rest of the group, especially with Garofalo, in order to have a premium package of labels in Italy, thus optimizing the distribution structure, Pasta.In North America, we've lost sales with a distributor who's prioritizing private label growth over manufacturer brands. We have, however, extended our market penetration by diversifying into new retailers that we've lost in the past.We are very pleased with these promising results of the traditional core pasta brands. We are less confident with the evolution of Health & Wellness, which continues to struggle really, mainly when it comes to wholegrain and -- because as Gluten Free and Supergreens don't match -- didn't match to offset this poor wholegrain contribution, which are out of [ route ] these days.Same with the Rice division, the costs of packaging and logistics and storage as well are having a significant impact, which is why we've recently announced a tariff rise to offset it.Pasta is a little bit less. Logistics year-on-year are [ EUR 70.5 million ] in costs. Packaging materials is EUR 3.2 million, and the uptick of other raw materials, excluding wheat, this is an uptick of EUR 4.5 million. It is an increase of EUR 15 million for those 3 lines as opposed to the previous increase of EUR 54 million in price. Fortunately, we're not having production problems facing the Pasta division, either productivity or employment. Most plants lay on the northern part of the United States, where we haven't been affected by the hurricane or having maintenance problems whatsoever.We now, however, have experienced some strengths facing the labor market, even in that area. Unemployment rate is around 3.4%, which is considered, honestly, as full employment. As such, we undertake measures on the last 3 years. We expect them to bear fruit. It should have been bearing fruit this year, but we suffered about EUR 20 million cost overruns. We would have reached an EBITDA of EUR 14 million, very similar to the all-time highs in 2015 and 2016. We'll have to pass this on to consumers where we are experiencing a highly competitive market, and transferring price increases to consumers is proving to be very difficult.The first 9 months of the year, the turnover is up to 3.8%, thus having an increase of EUR 930 million. And we are prioritizing promotion over advertising in order to maintain our market share.[ Currency ] have very a similar fate on the previous year. The division's EBITDA fell 11.4% to EUR 101.4 million, and currency had a negative impact of EUR 0.5 million. And the operating profit dropped EUR 19 million to EUR 63.3 million. It dropped 19%.We expect an increase of 6.8%; Bertagni, EUR 58 million contribution; and the organic growth will be around 2%. Advertising investment decreased but only EUR 1.6 million. Around Q4 is precisely when we clearly invest more in advertising, whereas EBITDA fell EUR 8 million to EUR 154.9 million. If the exchange rate remains at current levels, it will have a negative impact of EUR 1.3 million.The consolidated group results for the first 9 months of 2018. The consolidated sales figure grew 5% to EUR 1.9 billion, and currency had a negative impact of EUR 42.2 million. Advertising investment, on the other hand, fell minus 8.2% to EUR 66.3 million due to a greater weighting of promotions in the consumer communication mix. EBITDA fell 19% to EUR 211.6 million, primarily due to temporary costs in the North America rice business. I mentioned before, FX had a negative result for the first 9 months of EUR 4.3 million, the consolidated result. Our net profit fell 22.1% to EUR 99.7 million.This is the P&L 2018 outlook. Group sales are forecast to grow 5.1% to EUR 2,633 million. We expect to reduce the weighting of promotional investment and increase that of advertising investment by the end of the full year. We hadn't made any effort to reduce advertising because we didn't have expected result, no. We have yet maintained our investments in advertising.EBITDA will fall 15% to EUR 304.9 million, with currency having a negative impact of EUR 5 million. Net profit is expected to drop 33% to EUR 148 million. We would note that last year, there was a significant increase because of the accounting, the company tax in the United States and the new taxable rates for the United States, France and Italy and these tax-related measures approved.Net debt increased by EUR 265 million. We've made the investments, however, [indiscernible] accounted for [indiscernible] requirements of auditors. And we also need to take into consideration CapEx increase as well as the increase in working capital because of the situation of raw materials.Equity grew EUR 108.9 million year-on-year to EUR 2,111 million. We continue to work on strategic organic investments: managing raw materials in Cambodia; optimizing distribution in France and Belgium; optimizing capacity in France and the United States; increasing capacity in Bangkok, India and Italy that haven't been put into operations yet. All these investments will start bearing fruit soon. And we are also having new -- the creation of new capacities in the frozen goods segment in the U.K. and the U.S.A. And given the temporary drop in EBITDA, we expect the net debt to increase by 2.4x by the end of the year, having EUR 304 million in EBITDA and over EUR 700 million net debt.By way of conclusion, the various extraordinary factors in the last year will have a very negative impact on our cost structure. However, the positive performance of our brands and the take-up of new products demonstrate the underlying good health of our business.In this regard, we would highlight the difference in performance of the North American and European rice divisions. The North American division was hit hard by unexpected circumstances during the year, and this is yet to correct its results, whereas the European division was able to equal last year's EBITDA performance, an all-time high.We are starting to generate returns on the investments we are making and that we've made over the last 3 years in the United Kingdom, Spain, the Benelux countries, Cambodia, Thailand, India and the United States. Harvests are good, and we have been stockpiling our raw materials in order to start 2019 with great stability. And we are confident that our plan to considerably reduce costs will come to fruition very soon, especially cost reductions and the strong efforts in the United States.In short, it's been a very difficult year so far, but we've been able to draw some positive conclusions. On the one hand, we are planning for and prioritizing the reduction of volatility in our accounts. And number two, we are optimizing the areas where we believe it is possible to be more efficient by reducing costs. Not everything means raw materials increases or packaging increases or distribution.We could have been more efficient, and that's precisely where we are going to work strongly, relentlessly, with no delay, in order to implement the necessary corrective measures in order to go back to the right track of profitability. This is the existing situation. I would have loved to deliver greater and announce greater results, but this is the best forecast we can announce now for the year and closing for 2018.There's nothing missing, there's nothing hidden, there are no additional surprises. That's what it is. This is what the units are delivering.[Audio Gap]because we want to be cautious, and we don't want to say things we're not going to deliver in the end. This is the harsh reality. We want to deliver today as it is.Now I'll open up to questions. Thank you.

[Unknown Analyst]

I have 3 questions. If I'm not mistaken, a couple of years ago, you told us you have reached EUR 140 million in EBITDA, which was a sustainable level, but you were going to suffer more, better years, worse years, but this year, you have suffered all these cyclical events. My question is, towards 2019, can you offset this EUR 54 million in losses in the Rice division with this implementation of new measures? Can you elaborate a little bit on the situation going forward? What do you think EBITDA will be in 2019 given this volatility environment?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

This EUR 54 million of cost overruns in raw materials in the United States were the EUR 38.6 million. As I said, half of it, the aromatic rice is -- have increased the prices, although it took us a long time to pass it on to consumers not because we haven't implemented the tariffs, but because it takes some time for distributors to accept them. And sometimes you've got to make some concessions. Okay, let's implement it in 2 years. In the U.S., we are key leaders and the competition is trying to grasp some market share by pressuring the distributors. So this has some time lag. However, on aromatic rice division, we have undertaken all the measures. So on January 1, everything will be fully offset and all the price transfers will be eligible. The remaining EUR 18 million of nonaromatic prices, we clearly bet on the following. We thought the markets were going to correct this and this has proven to be the adequate measure because of the American -- and European markets have corrected already the excess prices for the year, for 2018, which means that in the United States, we have experienced similar levels. And in Europe, mainly in Spain, we have seen better prices and better quality, which means natural correction without the need to increase tariffs in those products. We haven't done so because we anticipate that if we increase the tariffs and the rice would go down, the competition will remain flat in going down, and we would be completely out of market, and it's not advisable to increase the tariffs and then to just reduce them 3 months after that because it brings down credibility. That's why we have been heavily affected in the United States because these are not aromatic prices. This is my answer to the raw materials cost overruns. Logistics costs have -- we've already in December -- most of retailers and distribution companies are paying these cost overruns of 6.7 in packaging and 9.5 in transport in rice. In pasta, as you all know, promotions are 67% of our sales while increasing our tariff that affects 33% of our sales, which is already stressed and very high. No. We shall reduce these promotions, get 2 per 1 and so on. We really need to reduce these promotions. We do add distributions. In rice, however, promo sales are 33%, where we have changed tariffs, as we did with noodles, which is a highly profitable pasta. Therefore, when it comes to rice, out of this EUR 54 million, if we were ending -- including the price increases in the U.S. market, I think we would have corrected absolutely everything next year. Although we must not forget that price of rice in the U.S. may go up for aromatic prices as well. I don't think so. I don't think aromatic rice prices will continue to increase because they are already reaching all-time highs. On the other hand, in the U.S., if you ask me, raw materials can increase again. Well, there is a very important harvest this year, and I find it very difficult to see that situation. However, in a volatile environment, that can affect us and thus bringing us to having to do this price increase ourselves, and that's where we'll have to react accordingly. As far as pasta is concerned, except in noodles, we are reducing the number of promos. We did it already last year but it was insufficient to offset everything. We [ made it ] because to me, it was important to have a strong floor of about EUR 340 million in EBITDA. Since then, we want to build on that. And last year, we reached even EUR 360 million, and this year, in 2018, we expect it to reach very positive results, but we have suffered all these negative pitfalls that were complete setbacks that led us to think rationally. What can we change and do without thinking about raw materials? If you tell Riviana, are you doing something wrongly when they made EUR 137 million in profits, well, that's a bit mistaken. But Riviana had really enjoyed a very upward trend. Sometimes you need a setback to really think that things could have been even better or perhaps that we should have taken some decisions in some cases. Well, so we had to rethink about Freeport, thinking we're sustaining perhaps unprofitable projects. So with the benefit of hindsight, well, you rethink about the profitability levels. You don't want to change anything, do you? We are aware that this 134 were very positive, however, the management of Freeport could have been better. We could have been much better in Riviana, in the supply chain. We could have been better in trying to reduce logistics cost before they hit us hard partly, and unexpectedly, perhaps, our housing could have been better to have less raw materials in external warehouses. Well, sometimes when the necessity hits you hard, you rethink about things that you could have done better, and that's the whole rationale. This is precisely what we are doing at the moment, things we could have improved even the year where we reached EUR 137 million all-time high, when we think everything couldn't go better. So if you ask me about my forecast for 2019's EBITDA, can't tell you now, however, I'm convinced that it's going to be much better than this year. I have no doubts about it. We're going to try and beat EBITDAS for 2017, honestly. We are trying to correct our mistakes, in those areas where we can improve, and we have already implemented some corrective measures with regards to raw materials. Next year, we start refurbishing in some areas, and we've been very unlucky when jasmine prices are up. The facility is full of bricklayers. You cannot store anything because we don't even have a ceiling. So now with the benefit of hindsight, well, I think we should have changed things, and I'm sharing these ideas with you or perhaps in the U.S., there are specialized maintenance. Personnel is short and worse than in Europe, and well, I don't want to go into detail and compare anything. I don't want to compare our childhood with their childhood. But in Spain, our O&M is much better than in the U.S. or perhaps less expensive. Perhaps if you want to have such O&M capacity in the U.S., you need to pay an awful lot of money. So with the problems facing Winchester different to Freeport and this is a fact, a harsh reality we are facing. We have announced a 20% headcount increase in Freeport because there's a massive turnout. Amazon has already done it as well, increasing prices in the logistics warehouses in Texas. The payroll is increased by 20% because otherwise they are fleeing to other petrochemical industries. Imagine the rotation, every 15 days, changing companies. You go to another job post, and until you are attuned, it takes you a long time, and that is the harsh situation. They're just cherry picking their companies, and this is heavily affecting us. The solution is rather radical. As I said, in Texas, we'll have to transport less than 50%. But when we did a P&L, we realized that over the last 5 years, we weren't making any single penny with these clients. So we're not going to be affected. We're just reducing the fixed cost if you reduce business, but on -- go down on fixed cost, you're not doing the right job. And this is a situation in the U.S., an extraordinary rice business with a lot of hindrances in 2018, and I expect these hindrances to be cyclical. The rice business was a bit complicated. We have reduced the number of core pastas, Barilla is going down in core pasta, and we're going up. So there is an increase of private label in the U.S. However, [ Brillante ] is growing and the others are struggling, Barilla, among others. They're suffering their difficulties with logistics packaging, headcount, inflation in the U.S., and this is the macroeconomic environment we're facing in the United States. On the other hand, in Europe, we have very similar results to the results last year, although the inefficiencies of producing, for instance, microwave products when we didn't have to do them and paying a very expensive rice cost because we didn't think we weren't going to plant in Andalusia, Extremadura and Portugal. We bought absolutely everything at whatever cost. So it's been a rather prudent measure. However, we have the same EBITDA year-on-year. So I cannot forecast the results for 2019. We're buying better than last year, and unless there is a tragedy, well, we can expect similar results next year. As regards Panzani, a difficult market, a difficult management of distribution retailers, but we are growing year-on-year despite the very heat waves but -- we are trying to encourage products that go well with the hot season because in Lyon and France, in general, I don't know if you watch the news, it was hotter in Germany than in Spain. We had some mild conditions. However, in Germany and Central Europe, people tend to drink more beer and consume less pasta. They start eating more salads and this is having an impact of minus EUR 5 million in Panzani and also affecting Roland Monterrat. Garofalo, very promising results; Bertagni, very promising results despite the adverse macroeconomic environment. So part of Europe has been affected by the [ country, ] the hot weather. And despite everything, we've had all the good results, and in the U.S., we are a bit affected. And it seems that we can overcome the issues in rice because they haven't affected sales. Well, we have just a number of programs, and next year, we'll have mixed market share. Some things that are not profitable, we are going to discontinue selling them. We have inherited some things from the American Rice, and we're just going to maintain the profitable businesses. Maintaining nonprofitable businesses is not the idea. We're going to reduce half of the production in Memphis, and this will affect, obviously, the top line. But in a positive way, the bottom line will be having a positive contribution because we've been having negative EBITDA in some plants. You know me, I always focus on the bottom line, the EBITDA, not the top line, and I still hold the same opinion. We need to have very profitable businesses, and if it isn't the case, after the passing of time, we're going to just eliminate it or just sold it. Some things vanish on their own and some other things are sold, the nonworking things shall be sold. Perhaps, it doesn't work for us but it can work for another type of company with another profile or another approach. I am rambling here. You still have 2 questions.

[Unknown Analyst]

Can you give us the CapEx information, please? What do you expect the 2018 CapEx year-end?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

Plus EUR 10 million on the previous year to September. I had another one in September. I think it was EUR 69 million last year and it is EUR 79 million and it'd be EUR 140 million by year-end.

[Unknown Analyst]

How about 2019, do you have this figure?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

Well, it remains to be seen what's left to be paid in Memphis.

[Unknown Analyst]

Debt levels are reaching very high levels. Can this affect the payout ratio? Can it be affected, the dividend? Can you streamline dividends?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

I can't anticipate this, but this is up to the Board of Directors. I am not, however -- we have suffered the downturn, and the dividend policy shall be constant because I still have some buffer, some room for improvement. And I would like to maintain the payout and this is my proposal to the Board of Directors to have an unchanged dividend payout. And if it changes, it'd be unmaterial. My policy, though, the way I see it, vis-à-vis shareholders or long-term shareholders, the once -- stable shareholders of the board, we want to continue receiving a good, solid, stable dividend, and this is our view. More than half of the board are long-term shareholders. Perhaps, next year, we'll have to adjust our working capital. There may be more sales because we had an overstock of security, and there are more sales in some areas that can bring stock to reasonable levels. However, no, I don't think the payout will be affected. No dividends will change.

[Unknown Analyst]

Antonio, I have 3 very short questions. First, [ outlook ], will it imply a restructuring cost like getting out some labels and transferring them to Memphis? Are you undertaking any streamlining measures? Are they discounted? Or have you included them in these figures?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

What we have done so far, as I said, we are eliminating volumes with private labels, industrial businesses within the umbrella of American Rice.

[Unknown Analyst]

Are you talking about write-offs?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

No, no, no. The answer is no. There are no write-offs, write-offs. Perhaps today, we -- Freeport is an issue, but 2 years down the road, a facility, which is marvelous at the port, can be very flourishing. So we're never ruling out any possibilities or perhaps selling things or engaging in new businesses. We never rule out any possibility, never. So it isn't affecting our levels, and we don't think we need to do any write-off.

[Unknown Analyst]

A little bit on that line where you're always open to other possibilities, disposals of assets, closing down facilities.

[Antonio Hernández Callejas, Chairman of the Board & CEO]

No. No closing down the facilities, no, closing down some activities.

[Unknown Analyst]

Well, the question is what your plan for Roland Monterrat and especially what's happening with sandwiches?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

The product by Panzani aims at changing the company's profile and to complement the sandwich activity with more premium businesses, more related to snacks, and we think this can pay out, this plan. Moving on to our more snacking concept. That's where we're elaborating with our R&D department and it will take some time to be implemented.

[Unknown Analyst]

And lastly, in line with [ Paco's ] question on the payout ratio to be unchanged. Have you envisaged, given the share price, that part of the dividend policy may be modified, having repurchase of shares and any...

[Antonio Hernández Callejas, Chairman of the Board & CEO]

No. Personally, my children have been buying shares at EUR 18.50 per share this year. If I don't think that's the accurate value, I will not let them. It's not that my children are multibillionaires, but they were buying significant packages of shares.

[Unknown Analyst]

And I have a very quick question.

[Antonio Hernández Callejas, Chairman of the Board & CEO]

I made a lot of mistakes, by the way, buying stocks in the market. I'm even worse.

[Unknown Analyst]

If you see the effective tax rate of about 31% -- For the preclosing of about 31%, you've historically had roughly 33%. Don't you think that difference is not too high, especially given the tax reform in the U.S.? Or is there anything tax-related you're expecting this year?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

I am no expert in this. I haven't paid close attention to it, but Manuel is going to double check this information and he'll get back to you. And this 29% -- and in Spain, if the current, this doesn't affect as we had a very beautiful negative taxable basis. Manuel is going to try and verify that. We'll just do it at the year-end closing, okay. Year-end closing.

[Unknown Analyst]

I just have one question regards to Garofalo. The first question, I'd like to understand what happened in the U.S. where sales were below market expectations for the year. And the second question, I just wanted to understand what is the recurring EBITDA level for Garofalo. You have invested in advertising. Do you think that is sufficient in 2018? Or will we continue to experience these levels for 2019 going forward?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

In Garofalo in the United States, it has 2 sales lines: one, Garofalos, in charge of Garofalo with the office in Gragnano; with private label, food service and Costco. In Costco, we -- they only sell -- buy products with Garofalo label; in food service, Garofalo; in private label, it's Trader Joe's. And this is dealt with Garofalo. Riviana only deals with Garofalo for the rest of retail. When we took it this year, it was a very small volume because we sell 50 million kilos to Costco and this prevails. And please don't share this information, which is strictly confidential, okay? And before doing any promos with Walmart or with small Italian supermarkets, the important thing was to maintain the relationship with Costco. This year, Riviana has broken their label with the rest of the retail with a very different proposition versus Costco, very much focused on organic products than anything else, whereas we are building another proposition based on [ premium ] or very premium pasta, which we're doing with the same net rate in Riviana, the DSD, the sales of rice. And what I mean by this is that it is very small compared to the business managed by the headquarters in Garofalo. Panzani is in charge of the management of Garofalo in France and it's going so well. Herba is responsible for the management of Garofalo in Spain. We are using existing resources of the group. We just started this year in the U.S., but with these price increases of rice and so on, where this was a very small business, we haven't done a very efficient work because our key priority was to place these cost overruns and to pass it on to consumers. Yes, there is a plan now for Garofalo in North America. And this year, we have started to sell in Switzerland, France and in Canada some Garofalo fresh pasta. This will continue to increase with the support of Bertagni. Garofalo's EBITDA continues discounting these advertising effects at the very profitable levels for 2017. If you discount our advertising, it make up the same. Garofalo always does advertising. It was the TV this year. They were sponsoring the Naples football club.

[Unknown Analyst]

[The interpreter apologizes. The analyst is not using the microphone.]

[Antonio Hernández Callejas, Chairman of the Board & CEO]

I haven't done the marketing plan for 2019 yet, we just have to analyze the advertising effects, especially in Italy with very promising effects, and we are growing ourselves in Portugal as well, and we need to see this is well dimensioned. Please remember that it's been a rather difficult year. That required a lot of advertising, Barilla also engaged in massive advertising campaigns. Molisana and De Cecco, everyone, absolutely everyone has invested an awful lot in advertising. And I believe that Molisana is now sponsoring [ Lazio ] football team, whereas Garofalo is sponsoring the Napoli football team. Garofalo is regaining some major recognition. With a good image, we have received the Tiepolo, an award issued by the Italian Embassy, which is a very important award organized by the Italian Embassy and the Spanish Confederation of Entrepreneurs and recognizing Spanish activities in Italy and vice versa. And I think last years, it was Endesa which received it, and it is us this year.

[Unknown Analyst]

I have a very last question, I forgot to ask before. Most impact that you have analyzed, most of them were in the second quarter, whereas I don't remember you mentioned anything about packaging on Q2. Therefore, the impact is mainly on Q3. What is the explanation of the increase in packaging?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

Perhaps, we only told you the most significant things. In case there was a major uptick, perhaps, we have greater stocks at the former prices. Perhaps plastic suppliers and cardboard increased prices since June perhaps. What we have in rice is 6.7 and 3.2 in pasta.

[Unknown Analyst]

I just wanted to understand this.

[Antonio Hernández Callejas, Chairman of the Board & CEO]

The biggest increase is in cardboard prices, by the way.

[Unknown Analyst]

Well, okay. Interesting. I have another question regarding Bertagni. Is this EUR 9 million of contribution? Or is this just for the first 9 months. It'd be roughly EUR 12 million to EUR 13 million year-end closing. So it is improving because the idea I have is that they were making roughly EUR 10 million.

[Antonio Hernández Callejas, Chairman of the Board & CEO]

No, no. EUR 12 million is what we calculated. A little bit less on the...

[Unknown Analyst]

When you purchased it, the margins were about 15%. It is experiencing a double-digit growth. My question is, is it having 15% margins or higher?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

I can't really tell you. I don't have the accurate information here. Sales are growing on Q4 extensively, experiencing even double-digit growth, so I've been told. And there's the general feeling that it will beat this EUR 12 million milestone we had when we acquired the company. I can't really tell you it'd be 12, 12% or -- this is the information that has been given to us by Bertagni. This is the information that they have prepared and drafted, which pleased the milestone that we had set for the year. The problem is that they sell to Mercadona this year. And also Mercadona is very pleased with Bertagni with a growth of 20-ish percent this year. Most fresh pasta in Mercadona, they stand by Bertagni, and the agreement is that we can't sell Garofalo made with Bertagni in Spain so far. They want exclusivity over Bertagni's quality, and we are quite pleased because 40% of the Spanish market is Mercadona when it comes to fresh pasta. Having 40% of the Spanish market, I think it's [ bel canto ], the name. These are our own labels but with exclusivity with Mercadona. If Mercadona want -- does not want to buy our labels, we can use [ bel canto ] because for those who buy in Mercadona, they are very familiar with [ bel canto ].

[Unknown Analyst]

What would be the impact of the decrease of activity in Freeport and the negative EBITDA of the activities that we are discontinuing in Freeport? We have a negative activity this year, and we expect the restructuring plan.

[Antonio Hernández Callejas, Chairman of the Board & CEO]

I don't know how much because I don't have the final figure. However, we expect the activity that will carry out in the Freeport activity, not the commercial one, but the industrial generation of the plan to generate about EUR 5 million next year. And what is the second question that you asked? We expect it to move to a positive threshold. Is that all?Well, thank you very much. I believe this has been by far the longest call. I expect the next ones to be shorter, yes? Thank you.