São Paulo, August 19, 2008 - LAEP Investments Ltd produces, processes, sells and distributes milk and dairy products, and to capitalize on its structure also produces and distributes cookies, cakes, juices and teas.One of the Company's main strategic targets is to expand its business and increase its market share, given the ongoing consolidation of Brazil's dairy sector.
With this in mind, we have undertaken a series of acquisitions and implemented certain adjustments to our functional structure in order to streamline growth, including increasing the number of working shifts in our industrial plants.
And growth was exceptionally robust in the second-quarter when net revenues increased by 49% over the Q2’07 and 93% over the Q2’06. Nevertheless, during the course of these initiatives, the Company was surprised by two adverse occurrences:
(i) the atypical behavior of raw milk prices, which have moved up substantially and have remained at high levels for some time. In addition, it has been extremely difficult to pass on the resulting cost to retail prices, due to the crisis of confidence that has shaken the sector due to the Ouro Branco (or White Gold) operation in October/07. The upturn in prices and their maintenance at exceptionally high levels can be explained by the purchasing pressure exerted by certain medium-sized companies in their milk basins in order to inflate their revenues, probably with a view to being acquired by the new market entrants.
(ii) unfounded speculation and rumors, including on the part of the media, surrounding Company affairs of a strategic and confidential nature, namely its allocation of investments between upstream and downstream and the organization of its capital into BDRs, which havejeopardized the image of the Company and its operations in both the stock and financial markets.
As a consequence, Management decided to: (i) reorganize its functional and managerial structure, with a shift in Management focus towards rationalization, optimization and cost reduction; (ii) slow the pace of its expansion and the growth of its market share; (iii) speed up the sale of inventories in order to bring them into line with the reduced level of sales, which will have the added advantage of generating cash to reduce the bank debt used to fund working capital. Nevertheless, despite Management’s measures, the period’s adversities resulted in a negative adjusted EBITDA of R$16.7 million equivalent to -4.1% of net revenues. Downstream EBITDA was negative by R$50.7 million, -R$23.1 million of which from non-recurring expenses and provisions and -R$27.6 million referring to the effective operating result (adjusted EBTIDA), equivalent to -6.8% of net revenues. The year-to-date adjusted EBITDA margin represented -4.3% of net revenues. The Upstream EBITDA margin was 22.3%.