Marfrig Alimento's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.10.13 | About: Marfrig Global (MRRTY)

Marfrig Alimento Adr (OTCPK:MRRTY) Q2 2013 Earnings Call August 8, 2013 10:30 AM ET

Executives

Sergio Rial - Chief Executive Officer, Seara Foods Business Division, Marfrig Group

Ricardo Florence - Chief Financial Officer, Administrative Officer and Investor Relations Officer

Analysts

Alan Alanis - JPMorgan

Wesley Brooks - Morgan Stanley

Eric Allen - Citibank

Jose Yordan - Deutsche Bank

Christopher Vandergrift - Hartford Investment Management

Operator

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Marfrig Alimentos S.A. conference call to present and discuss its results for the second quarter of 2013. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Marfrig's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions, because they relate to future events, and therefore depend on circumstances that may or may not occur in the future.

Investors should understand the general economic conditions, industry conditions and other operating factors could also affect to the future results of Marfrig and could cause results to differ materially from those expressed in such forward-looking statement.

Now, I will turn the conference over to Mr. Sergio Rial. Please, Mr. Sergio, you may now begin the conference.

Sergio Rial

Thank you. A very good morning to those in the Americas and good afternoon for those in Europe, and I would still say good evening for those in Asia, if there are any left for the call. I have with me the CFO, Ricardo Florence, accompanying me, together with our accounting team and Investor Relation team. So thank you very much.

We will start disclosing and talking about our second quarter, which is the quarter that I would qualify as a transition quarter. Before I go into the presentation, a couple of key highlights for the quarter. This quarter really shows Marfrig, not including Seara, because of the sale divestiture of the transaction, Seara will be reported under discontinued operations in Marfrig's balance sheet.

The transaction, as you very well know still subject to the antitrust agency in Brazil's approval CADE, which we still believe is going to be possible in the third quarter. But I would not necessarily be surprised if it would happen in October. We see no challenges whatsoever with the approval, but of course it does take its own time due to the materiality and size of the transaction.

The numbers you're going to be seeing do reflect, as I mentioned, the Marfrig post-Seara transaction, and I think we're giving also some important, at least drawing important steps in terms of opening up the group's P&L and growth items, so that the market can better understand Marfrig and understand us.

So let's jump into the quarter. The transaction clearly gives us a simpler portfolio. And why do I say simpler, because remember Seara Brazil, it is a result of 12 acquisition made in the last five years. Besides the brand and the whole story of potential growth and the opportunity that Seara definitely presents, it also embedded a very significant execution risk around integrating very desperate companies with different sizes and in different places throughout the country.

So we become simpler with three distinctive businesses that are not in many ways a result of a large acquisition. So my part, it's a company in its own, Keystone, the same in our beef business. We also believe we do have a good balance in terms of portfolio is important for us, and we're certainly committed to profitable growth, and hopefully a success, this is still a quarter of transition, but in the quarters to come we'll be able to prove and show to the marketplace what it means.

I would suggest we go to Slide 2, which is an important Slide for us. It is important because we do pay a lot of attention to what we say. And we want to make sure that we build the right level of credibility and reputation with those who are prepared to invest in our story. And I think here we're trying to show you what we said in the first quarter and what we have actually now in the second quarter.

We did say that we would reduce debt up to R$2 billion, and hopefully before yearend. In this quarter, you're seeing already R$1 billion net debt reduction already implemented. We still have R$3 billion of debt to be transferred to JBS of the remaining Marfrig Group. We're going to talk about that once we call for the debt profile Slide.

We said we would sell assets, we certainly did. We committed ourselves to a higher level of transparency with the Seara turnaround. We continue paying attention to the operating performance of Seara so much, so that we continue to present the KPI that we showed you in the first quarter, so four out of the five have improved, some of them really materially.

We were the first one to say there will be pressure on beef margins. We certainly experienced that in the second quarter. Our beef business has been impacted by the pressure of beef margins in Brazil, on the back of what I still believed, first half of the year showed a bit of a rational behavior for some of the beef packers. But in our case, in particular more impacted due by the restructuring of two plants in Argentina, which we said we would close, and also much more adverse scenario worldwide in the second quarter. We'll talk more about it later on.

Commitment to transparency, we are opening up Keystone, Moy Park in our beef business. So I think hopefully the group becomes easier to understand and easier to read and follow. A possible impact of the AI, avian flu, in China; AI as it is commonly known in the industry, that impact was observed in our second quarter, particularly in Keystone Asia.

For those who are following the market internationally, CP has just come out with their numbers. The Indonesian group with substantial poultry operations in Thailand and China in particular, and they were particularly hit by AI in a very significant manner. We did say we would close the plants in Argentina that is done. And we are committed to growth, and most all units have shown growth, some of them without a doubt, benefiting from a weaker real, so benefiting from what I would call translation story. But fundamentally all businesses have strong underlying factors for the future growth.

On Slide 3, just a simpler way of capturing, hopefully, what I just said. The Marfrig story from now on, it's a story of operational efficiency, expanding margins and certainly making sure that we present to the market more consistent returns in terms of, not only EBITDA, but definitely also free cash flow generation.

We have certainly strength the group. We are focusing on food service in particular. We will open for the first time, our food service line within the beef business. You're going to be in the position to see the results. There is some noise in that number, because I assume there is still some potential growth products from Seara. So at this point in time, I wouldn't call it to be a completely 100% beef only. But it gives you an extent of the potential growth of that channel in Brazil, and we have continued focus on execution.

Slide 4, the implications are clear. I think we did cover that in the first quarter, but just to remind us all, greater internal certainly to certainly now growth in Asia, which we haven't really been able to do. I'd like to remind you all, that we have a JV, a logistics JV in China with COFCO, where we have put absolutely no attention, no capital, no management strategy, whatsoever to grow that business. We have not even disclosed that JV. It's an important JV in terms of future growth potential. We have actually invested R$9 million in the second quarter into JV, but that's just one example of hidden jewels that exist throughout the portfolio that haven't really received the right level of attention from an execution point of view.

Reduction in working capital goes without saying, as Seara leaves the portfolio. And certainly, a lot less time, or management time on a very complex turnaround with Seara would continue to be specially now in a much more challenging economic environment in Brazil. We are turning with the 3.8 leverage ratio that only takes into account, the one being the net debt transfer. Once we would include or conclude the R$3 billion additional, our net debt leverage would come down to the three hang, so three times or around three times.

But we also present in this quarter the best leverage ratio, when you compare total debt or gross debt, forget about net, gross debt and over EBITDA, so a pretty solid number that we have never had in the past. I think we are committed to still continue to leverage the company, not because that target in Seara, but because it is growth with appropriate and adequate capital structure.

A three level in terms of leverage, as long as we are growing and generating cash, it does no concern me whatsoever, much the contrary. So we are not pursuing that facility a target under three, if it is three-and-a-half it would be a target that's self sustainable, in terms of us being able to continue or to be able to start generating free cash flow consistently. Still a great opportunity to reduce the overall debt cost. We are channeling 50 basis points, right there in the borrowing cost of the remaining debt. It's difficult to a certain how much that will be, but there is certainly money there to be made.

Governance, I think it's the signal of divestment of Seara. It's a clear commitment to upper governance and certainly governance sending a signal that it's actually working. From the Board of Directors to the executive team, it was not an easy decision, but was a decision that was needed. And will continue to pay a lot of attention to what we say and to what we do. What we say matters a lot, really matters a lot to us.

On Slide 5, it's just an attempt, a quick attempt, to give the market, how we see without and certainly going to a real detail strategic plan, how we see the remaining of Marfrig. We are the world's third largest beef producer. I think I am absolutely very much convinced that particularly the Seara transaction puts JBS on a completely different path in terms of focusing on profitability in the South American region. In their beef operations, they won't have so much latitude, to eventually behave perhaps more irrationally then they would like to see, which was what impacted the beef we experienced in the first half of 2013 in our beef business, which is an excessive growth in terms of slaughter in Brazil.

Very common amount beef packers, but also used to weak and other competitors in this space. I think Seara transaction will definitely keep JBS busy for the years to come, and probably motivated to also have a better beef business in South America. So we remain positive. And we'll talk more about our own case in the second quarter.

This is a business with EBITDA margins that can be stretched to 6% even lower, depending we've seen that in different markets, not necessarily Brazil. The 12% we have also ourselves experienced in the second quarter of 2012. There is growth potential and even I see in the food service channel, that there is more even profitability potential.

I mean EBITDA is one piece. I mean the market has been historically very focused on margin EBITDA, but I think we have to start also equally pay attention to the quality of that EBITDA that it either generating cash or not, EBITDA that it's not been just purely consuming cash, it's long-term not necessarily the right EBITDA. So it's a combination of EBITDA margin plus free cash flow generation.

Moy Park, tremendous potential for us in Europe on the back of, not entire, but most of industry players in a relatively weak position and we are growing organically just by being stable, solid with a terrific management team on the ground. We'll talk more about in Keystone. So this is an attempt in a sort of one slide to share with the markets, the look and the feel of the remaining part of Marfrig.

Slide 6, it's just an attempt to show that's how the market react. It's the first time for a long time that we have seen the Marfrig stock and decoupling a little bit from the Ibovespa. It was willing to see that the market has recognized that we come out despite the fact that we sold 33% of the group, our market GAAP has not changed. So fundamentally, I think it's a very, very strong message that the transaction was definitely accretive to Marfrig's shareholders, for which I think management feels encouraged, but there is a lot of work to do.

The bond market, bonds in general, also responded very well. And I think I would like also to give an additional color that the month of July was not a particularly good month, not good for fixed income overall, but even not good for Brazil. I think Brazil suffered from sort of a negative view of what was happening. So if the transaction probably would have been announced in the first quarter 2013, response probably would have been even stronger than what we have seen in the second quarter.

Nevertheless, good do seek response the way we saw. Rating agencies, most of them, all of them positive. I think Standard & Poor's perhaps the most straightforward in saying under review for possible upgrade. So they were the ones, they are basically very clear in signaling up an immediate possible upgrade.

Now moving to the second quarter, so a quarter of transition, but nevertheless, now the numbers you are seeing here are numbers not including Seara. So this quarter does include the sale of Zenda. So inside of this number you will see, of course, the capital gains and the gains with the transaction of Zenda.

Now some people would come to me and say, that really Zenda transaction is a non-recurring item, you don't need to spend time on that. But if we would have not sold Zenda, the related cost for the shutdown of a number of plants, assuming would not be able to find buyers to the South African plant to the office in Germany, to a plant in Mexico, and definitely to the large operation that we had in Uruguay, we would have seen potentially significant losses in the quarter related to the shutdown of Zenda.

So we are pleased to see that we found a better path than just a straight shutdown that actually even generated positive impact to the quarter. The quarter of 2012 also reflects coincidently with another normally re-incurring item, which was the divestiture of the logistic piece of Keystone. That's also embedded in the second quarter of 2012.

And then what you see is the impact also in the quarter of the foreign exchange impact related to the deprecation of the real relative to the previous quarter, which generated a negative impact of R$427 million to the balance sheet. I think you have seen some other Brazilian companies also disclosing their numbers today and recently, and they all have been pretty impacted by the foreign exchange impact on the back to a dollar, in our case R$427 million.

So lots of big numbers in the second quarter and of course we also took the opportunity in the same period to do the right thing, which was to accelerate the closure of the two plants in Argentina. I don't need to say, need to reinforce that's it's a country of price controls, it's a country with cattle levels had dropped to unprecedented low levels. It's a country where the foreign exchange rate has accelerated to levels that began create a congestive markets to all kinds of practices that makes any normal business difficult to make money.

So we have after the divestiture to Brazil Foods, our assets in Argentina, we are pleased to enter third quarter with half of what we had before. Uruguay was impacted just quickly. The Uruguay business, where we are the largest company, but also the largest packer was impacted by the following factors.

Uruguay like Argentina for many, many years have kept the dollar priority to their local currency pretty much unchanged. While local currency cost, which is most of the cost, it's not all cost, have increased double digit over the last five, six years. So we have seen significant increases in wages 20% to 25%. We have significant increases in energy, but none of that of course got reflected in the priority dollars peso. That's one data point.

Second data point, increased and disorganized slaughter. So lots of small players increased there slaughter capacity, many of them are now pretty much bankrupt, they have no access to working capital. We have seen that already in the last part of the second quarter. And third export prices were not particularly good. So they were pressed, so we certainly experienced in the second quarter in Uruguay a worse drop off than I think we had originally expected. I'll talk more about going forward.

In Brazil, the impact was mostly on the back of the increased slaughter capacity that I mentioned, and I will make some comments also going forward. So with all of that, the number that comes down is R$159 million, definitely help by the divestiture of Zenda, but also definitely impacted by a foreign exchange impact of R$427 million. That's pretty much explained on the next Slide 11. I will just add that our beef operation paid a lot of attention to cost management, as you can see from a reduction of 50 basis points in SG&A, when you look at to the second quarter 2012.

Slide 12, this is a good future of the net revenue growth of Marfrig. Again, this does not include Seara. And of course, some of the numbers are out by the dollar real variation, some translation benefit. But fundamentally we're going to see it later on how those businesses are growing. Equally important to see is that we as a business, we are very much exposed to the dollar and euro and sterling, even more than the real, which is not something many of you would naturally think.

If you believe in a trend, where emerging market currencies will continue to give value, a little bit different than I think we have experienced over the last five, seven years, it's a good place to been. It's a good place to being as exposed as we are to euro, sterling and dollar. But we still grew 51%, it's processed, its value-added products. Not necessarily commodity, which again the other thing that people would not generally see is that 54% of the revenue, it's already coming from Moy Park and Keystone.

On Slide 13, we are seeing Zenda margin, and here the gross margin and gross income, in particular impacted by what I just said, Argentina and Uruguay and the over slaughter that I think took place in the first half of 2013 here in Brazil. We are not breaking down the numbers. We are not giving the market what was the impact for the two plants in Argentina, what was the impact of Uruguay, but both had a significant impact to the overall quarter, which we also hope and we will articulate it'd be more going forward. SG&A as you can see, a very important contraction in the beef, part of it helped by some of the closures that I think we are having. Argentina is one, but also a reduction of overhead in all three countries.

Debt, so the debt picture you see here, basically does not include, in other words, it still includes R$3 billion, which will be transferred once CADE approves the Seara transaction. So you would have to take another R$3 billion of that out of this portfolio, which would be from 2013 as far as 2017, which will bring our leverage around 3 times. It'd be 3.1 times, 3.2 times, maybe even 2.9 times, but around 3 times, which we find to be appropriate at this point in time, particularly in the market where credit is going to be perhaps a little more harder and Brazil going through a less positive phase as we have experienced over the last two years. So from a timing point of view the transaction came at the right time.

Now, moving on to the business units. We are disclosing as we promised to the market our commitment to transparency. And Keystone here on the revenue line, of course 12% growth, but also some translation benefit, but pretty much impacted in the second quarter by AI in China, avian influenza, which had impact both in terms of China itself, but also demand in the couple of other markets, particularly Japan that basically imports a number of chicken products out of China. Keystone, China, does export to Japan, for example. So that also got impacted, not just by domestic sales, but also by their straight flows into Japan.

The margin of Keystone, as you can see, on a more normalized basis is between 6% and 6.5%. The greatest opportunity for Marfrig now is margin expansion, both in Keystone and Moy Park. And it is absolutely possible. The question is how fast and how well can we actually grow the quick service restaurant businesses. There are just not McDonald's, as you very well know that McDonald's is a very important and dear customer of Keystone, but we also have opportunity and they have done so, expanding the businesses to other customers around the world and it's certainly helping not only growth, but margin expansion.

So on Slide 16, we're tried to capture, Keystone really benefited also from a very benign and positive chicken environment in U.S. I think you've seen that in Tyson, you've seen that in Pilgrims, revenues increased 14.5%. And more important that the price as average price went up, 24% in dollars. So eliminating all kinds of translation law, currency translation conversions, so pretty solid, but definitely impacted by the AI event in China, which we do not see lingering in the coming quarters.

Moving to Moy Park, despite everyone's views about Europe, it's all about where the meat industries in Europe. And meat industry in Europe is not in a good place. And Moy Park is in a good place. Recently 2 Sisters have acquired Vion, which is a large Dutch meat company or meat group, which basically help to consolidate further the U.K. market.

That basically during the time, where Vion was been sold, and also other players are either being sold or being shutdown. That's creating an interesting opportunity and dynamic, where customers are actually trying to secure their supply chain with the bigger and more a stable meat providers, animal protein providers. And Moy Park has benefited organically from this extended demand, which I think I do believe that it will continue to be in place for a while. So you can see a solid revenue growth, but more importantly a solid EBITDA growth, which I do not believe will change in the near future.

On Slide 18, to give you some data. Increasing fresh poultry sales almost 20%, that's a testimony to this type of demand, basically not only new customer, but also increasing our presence with existing customers. Successful reorganization integration of the business units in Europe, I think Moy Park it is Marfrig's commercial in genuine Europe. So we have a significant infrastructure in Europe that I think is our obligation to be able to capture and extract synergies.

And the last moving point is very important. I mean there is a clear trend and stated even, some of the key customers, throughout Europe, but more noticeably in U.K. that they want to source more and more poultry, not only poultry, beef out of the local base. So a very solid quarter for Moy Park in that respect.

Marfrig beef, clearly we are opening for you the food service channel and sales. As you can see, the growth of 22% quarter-to-quarter, we are by far the strongest player in amongst all beef factors in Brazil, in terms of food service channel. It is the origin of Marfrig, it is the history of Marcos Molina, controlling shareholder.

And I think in this number, of course, there is still some noise related to Seara products. They are not beef carriers really the bulk, and by bulk I'm talking more than 70%, but there is still some noise here related to Seara related products. But I think what is important to show you here, is this is a very relevant channel. And if you do believe in the growth of (TSRs) in Brazil, when you compared to some of the other large continental economies, I think we are well-positioned to capture that growth.

In Europe that I think we are trying to position ourselves better, not yet capture here in the first half, is with small-to-medium size customers. The leader of our logistics today, the team that basically turn around Seara logistics, which we're going to see a little bit later, really remain with Marfrig. So we believe we're going to keep very talented teams that will enable Marfrig beef in Brazil to tap more efficiently from a cost-to-serve point of view of smaller customers.

But the business was impacted as mention by Argentina and Uruguay, and you'll see that reflected in the adjusted EBITDA margin of 71% since the Zenda transaction is a nonrecurring item.

So in terms of Slide 20, I want to give you the confidence that the beef business remains solid. We are happy to see that we were able despite the challenge in Uruguay and Argentina to decrease SG&A expenses, when compared to second quarter of 2012 and 6.2% is not a small number.

I do believe a weaker riyal is here to stay for the coming quarters. That should probably give us a bit more exposure to the export markets. I do believe in our focus on food service. And I also believe strongly that what we've have seen in Uruguay in the second quarter will improve in the third quarter, which we can expand more during the Q&A session. Plus we also want to share with the market, the KPIs, that this is the team that promised to give the market visibility, to turnaround of Seara Brasil. And we remain committed to that.

So going to Slide 22, it's clear that we have both with the Seara brand and Rezende brand narrowed the bright gap difference with the leader, so we are happy to show you the Nielsen graph and definitely improving from where we were in the first quarter. We also saw very significant discounts put in place by a number of companies. I mean, the market has accumulated higher levels of inventory, partially explained by the slowdown of the Brazilian economy in the second quarter, but our average price was not impacted much to contrary. I think we did benefit from our focus on migration to small and medium-sized retailers. So that really played.

But we could only do that, if we would have fixed logistics, which we did to the degree where we were lacking the fourth quarter of 2012, which was really a low level sales mix. It's not a target itself, but you can see that there has been an increase to exports on the back of, a more opportunistic approach towards margin, as the dollar helps some of the exports to become to be more profitable.

On KPIs sales on Slide 23, sales with more mid-size retailers, you can see the significant growth that we have experienced, which basically also tied out to the price, to the narrowing of the price gap of the first KPI. I'm happy to report the fill rate, which back in the fourth quarter, we were down at 67%, was not a very honorable moment of management team and we were back to 80%, ending July, we are above 80% in the number of places in the number of our warehouse. So SG&A is the only one out of the five that we haven't really made the progress that is worth commenting.

So key final remarks, so that we have sufficient time for Q&A. Everything is going well with the transaction related to the Seara. We're not concerned in anyway regarding various factors, there is no overlap between JBS businesses in Brazil with the Seara transaction. Once that is done, the R$3 billion that I mentioned will go to JBS and we have even a stronger capital structure.

We're committed to give a clear strategic plan for our future growth and particularly focusing of margin expansion, how we're going to do it. We are contemplating to have our Marfrig Day, eventually in New York, maybe in the fall, where we plan to disclose with quality and time to investors what we're committed to do.

We are not concerned with the results of the beef in the second quarter. We are disappointed. I think we did what was right in terms of Argentina and I think we did what was right in terms of acknowledging some of the challenges in Uruguay without really making the picture bad, but there is nothing that worries us structurally.

It is our belief that the leader, JBS in particular, it's highly motivated now since it does embrace a significant execution with Seara to be motivated to be profitable and to be a bit more disciplined, how it goes in terms of production and definitely in terms of margin. It's the same team, that has executed the divesture and it's bringing the capital structure to where it should be. And it's the same team that is definitely committed to delight you if we can, we're far from that, we've recognize. But we are absolutely committed to create a story that will make you proud of being the shareholders of Marfrig.

Give us time, it is a transition quarter, but in light of significant changes and big movements in this quarter, we're not proud over the loss, but we're certainly proud with the number of concrete steps that are being made with the company in the number of fronts. So it's still a story that it's being built.

With that I stop and I open up for Q&A. Thank you.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from Mr. Alan Alanis with JPMorgan.

Alan Alanis - JPMorgan

I have few questions actually some of them are more housekeeping. Do you plan to provide the market with comparable numbers for the first quarter of 2013? That will be my first one. And in that same line of thoughts, I could not find your cash flow for the quarter, I could find for the half of the year, if you could talk a little bit about that?

And now the specific question, in terms would be, regarding free cash flow, correct. I mean, we are seeing in the first half some sort of consolidated deterioration in working capital across the main lines, in terms of receivables, inventories and payables, could you talk a little bit about how are you addressing the working capital situation of the company and what's your outlook for cash flow generation for the remaining of the year and 2014?

Sergio Rial

We decided not to compare it to first quarter, because not for any other reason, but I think historically, we have always compared second quarter to second quarter. We are certainly pleased, there is any particular angle we want explore. We're certainly open to explore any angle, but there wasn't anything, than just following what we have done in the past.

In terms of cash flow, and that's a very important question, how do I see it? Yes. It is mentioned on first half. We felt first half was a better reflection, because maybe the similar question would have happened, which is, what was the cash flow of the first half as opposed to just the second quarter? So we decided to present first half just to give a better picture.

Now, the working capital need of the group, it's very much and fundamentally residing on the beef operation. I mean both Moy Park and Keystone are relatively almost self sufficient, maybe that's too much to say, but relatively modest. And one of the things we see in our group is that we have the leverage in the wrong place. The leverage of the group should actually be more in Moy Park and Keystone than really be in Brazil for operating.

So one piece is the three time, the other piece is, what I would call, the interest cover ratio, which for the group, we have plenty of opportunity to improve, as we have more debt outside the Brazil than we have it inside of Brazil. Working capital needs, so it's fundamentally taken by beef not so much Uruguay for that matter, because the cash cycle of Uruguay, you actually buy cattle in Uruguay 35 to 40 days.

Alan Alanis - JPMorgan

So its better in Brazil, it's complicated?

Sergio Rial

Yes. So Uruguay it's actually a blast. I mean, the challenge that we had in Uruguay was actually rational behavior in terms of slaughtering. As I said, cost in dollars, when you bring them back to dollars, totally out of line and really weak export price, so the combination was deadly for the quarter, but structurally the business is really sound from a cash point of view.

Brazil is not so as you very well know. And in the marketplace too much attention addition to EBITDA margin and not enough to free cash flow generation, you can have 12% EBITDA margin considering terms of loss and I don't see that to be a good result, because definitely what you're doing is you continue to increase your investments.

But going back to your question, as we credit with R$3 billion, off the debt, I'd mentioned to JBS, we also going to have a quiet bit of cash coming back to the group, because we have some norms collateralized with export receivables and, what I would called, too much cash and there I will be counting somewhere between R$100 million to R$200 million range. That's one.

And the other thing that I'd like you to pay attention to the release is that the previous (inaudible) guy, but he retired. And we really put a team around Beef Brazil where finally we have someone fully dedicated to the cash cycle of this business. Beef in Brazil, we know how to slaughter cattle. We are actually very good. Our products are premium. We are considered to be top quality, but we haven't done a good job in terms of managing the cash cycle. That perhaps Minerva has done as a competitor. So we have plenty of opportunity for margin expansion inside our beef operation in Brazil.

So answering your question for the remainder of the year, so we did spend about R$200 million, I would imagine somewhere maybe close to R$100 million negative, but it's early to say, although Seara, it's definitely out of the books in terms of discontinued operations, we are still supporting Seara, until it gets actually transfer. What I can tell you is that Seara hasn't helped in terms of cash generation for the group. So the fact that Seara leaves, it also leaves an important cash drag for the groups, so the sooner the better.

Operator

Our next question comes from Mr. Wesley Brooks with Morgan Stanley.

Wesley Brooks - Morgan Stanley

So first question, maybe, coming back to the beef business. You say you're not going to give us the numbers of Argentina versus Uruguay on that, but can you just give us some idea of how the Brazilian beef margin looked relative to maybe Q1 or Q2 of last year, please? And also, can you give us some idea why you won't give us the granularity of how much the various thing impacted?

Ricardo Florence

So Brazil, what I can tell you, we decided not to give, not because we want to hide anything, it's just, its complex restructuring stories in what I would call complex countries, not that Brazil isn't. But we just decided not to be completely transparent in that respect. So in the case of Brazil, we were still the high-single digit, double-digit type of territory. So we were lower than the first quarter, but nothing that would concern me if we would only have Brazil. But we decided rather than taking a more that in hold for third quarter and fourth quarter for Uruguay and Argentina we decided to be a bit harsher in the second quarter with both Uruguay and Argentina.

Wesley Brooks - Morgan Stanley

And then just coming back to Seara and trying to reconcile, sort of, your actual results to your adjusted results, can you give us an idea what the EBITDA in Seara was in the quarter, in Seara Brasil?

Sergio Rial

No, we cannot. And we never disclosed Seara Brasil EBITDA, but what I can tell you it is progressing, but not to perhaps where the market has put Seara's EBITDA in the best. So I think Seara is still a very significant turnaround story. And I wouldn't like to take this lightly. So there is quite a bit of work still to be done. I'm happy to share the KPIs and they are there.

So we are absolutely going into right direction, but if you take for example, just the whole benefit of continued price increases in Brazil, that hasn't really happened because the Brazilian economy slowed down from the industry. So we were both confronted with volume challenges and price challenges in terms of being able to increase price. So EBITDA was impacted by that. EBITDA also has been more recently impacted by a different grain price behavior, soybean meal has spiked in July contrary perhaps to what we had experienced to our hope. So it's too a challenging story.

Operator

Our next question comes from Mr. (inaudible) with Espirito Santo Investment Bank.

Unidentified Analyst

If we could go back to the leverage calculation of the business and, kind of, some of the remarks you made, you stated that, net leverage is now 3.8 times and if we assume the other R$3 billion that's going to be transferred with the asset sale, we're looking at three times that leverage, having said that there is a lot of non-recurring items on the EBITDA that you used for that calculation.

Once those nonrecurring items drop off, what is your expectation for net leverage? And is your target to remain at this three timed that you have, kind of, mention here at the end of the kind of lowest level for any of the other competitors. Is your expectation that you're going to be able to maintain that once you'll have the nonrecurring items on the calculation?

Sergio Rial

So the short answer is absolutely, yes. I think I'd like to see Marfrig Group in the three ranges. The three handle, closer to 3 than to 3.5, but that's going to be a function also of growth, particularly outside of Brazil. If you look at the group and you abstract from the exceptional items of both quarters, not because first quarter '12, second quarter 2012, remember Keystone logistic are the marketing driver. So it also had a, sort of, a similar type of significant transaction.

But when you think about our sales, I mean, and now you have a number of the second quarter. I'm not saying that it's all about extrapolating, but you can see a group that basically sells between R$17 billion to R$20 billion, right. Now, part can be held by weakening riyal, part will be held by organic growth that I think we are seeing. So let's take R$20 billion, not just to be optimistic, but just to facilitate calculations and, again, and I'd like to repeat that with all the disclaimers, this is not guidance, it is just we are talking hypothetically around that.

With R$20 billion and a group that can out say, even on a stressed basis have a margin of 7%, you're seeing an EBITDA of potentially 1.4% to 1.5%. And for a CapEx that's going to be reduced and for a working capital that it's going to be reduced, this is a group that has the chance for the first time to actually generate free cash flow.

And hopefully part of the cash flow will going to grow, but part would also grow into maintaining the debt profile of the group. It doesn't have to go under three, but it doesn't have to be constantly impacted by non-cash generation that keeps on increasing the debt levels of the group year-after-year.

So we're going to have to reverse, I think if we can reverse that structural trend, then I'm less concerned where it's 3.3%, 3.4% or 3.1% what I think we cannot have is that 3% and continue to burn cash in 2014, so somehow that that will change. And if the margin of beef is 8% as supposed to 12%, but its generating free cash flow, I'll take it, so I'll really take it. Because having credits around taxes, which are good from an accounting point of view, but do not bring cash into the bank account.

So we have to look at business that are really generating the, sort of, cash that will keep us with the adequate capital structure that we want. So my point of view is, we are committed to three handle and we are even more committed to that the business as such will allow us to remain healthy from a capital structure point of view.

Unidentified Analyst

And one another question, if I may. You have mentioned that the focus now for the company is to focus on operational improvements versus in the past there was a lot of growth through acquisitions. So I guess, should we not expect any significant acquisition from the company in the following quarters, years. And any growth that we see should really come from organic growths, and improvements from the operations? Is that the way we should think of Marfrig going forward?

Sergio Rial

I hope not. I think what you should not be afraid of the market for that matter, is that we are in an equitative movement, that's absolutely not. We are in a move to improve and expand our margin. Look at Moy Park, phenomenal quarter with 6% margin, so if you bring Moy Park to 7%, the investor profitability is pretty significant. If we bring our Beef Business to both, being more free cash flow positive and a solid even if it's single-digit, phenomenal for stock.

So but then saying, Sergio, you will not acquire in the years to come, I would say, well, I hope know, I hope we're going to be able to it with the appropriate capital structure. And given the market, the right confidence that we are discipline financially and it make sense and its accretive overall.

We are looking for example at entering the Indonesian market as far as Keystone with the JV partner. So we would not go into Indonesia to acquire a company and raise in terms of debt. So this sort of things are not going to be happening, that I can tell you. But saying that we will only be focusing on organic growth, I think it's curtailing the true potential of the portfolio.

Operator

Our next question comes from Mr. Eric Allen with Citibank.

Eric Allen - Citibank

On just a, kind of, follow-up on the prior question. I was coming up with somewhat similar EBITDA numbers from a recurring basis. And I was also taking the R$3 billion that still need to be transferred and when I do that based on what we have for the second quarter, I guess, a net leverage number of about 4.1 times, more or less, looks like no FX impacts this and we can't really forecast that.

So I guess, kind of, where I am going with this is expectations of free cash flow generation in the second half or over the next three or four quarters would have to be along the lines of US$300 million, US$400 million, does that make sense, without putting you on the spot, although, I am. And I apologize for that. But do you think based on what you just said about operating businesses to generate cash that that isn't achievable number, because that's where you're going to need to get into that net leverage target area that you broadly sketched out from say, 3 time to 3.5 times. And I have an additional question after that as well.

Sergio Rial

I would suggest that we first established the baseline on how do we get to 3.8 and how do we say that once the R$3 billion are transferred we'll get to a lower three. So I will give it to Ricardo. So Ricardo, maybe walk us through.

Ricardo Florence

In there really is, you have there, what is the current investments of the company, and it would comprise a sold-out that we have in Marfrig, in a continuous there, which is R$11.1 billion. By excluding the cash in equivalents, you have the R$8.77 billion which is our recurring net debt. Let's talk more of figures in EBITDA. It's not the figures, which Sergio mentioned, but actually R$2.29 billion which R$8.77 divided by R$2.29 gives us a 3.8 times.

The calculation of the 3 times or roughly this, it could be a little bit more or little bit less than this, it should be by excluding the additional R$3 billion to be transferred to JBS, what Sergio updated to you, that would give us decrease on the net debt, but probably a bit less than R$6 billion, which would give us, of course, a much better leverage. But we have to do more to this.

We have to continue to work in the reduction, on the cost of our debt that's one of very strong point. We mentioned during the presentation, the opportunity that we have there to decrease it, we after the conclusion of this deal, I believe that will be a much more deleverage company. Here is basically work, we have the opportunity to improve the cash flow. It's basically through the combination or improvements in operations by being a discipline company, investments and also in the reduction of the interest that we pay on our debt. Put altogether in the same basket, and you will have that's a much more deleverage company that's basically, it's our goal.

Unidentified Analyst

Well, I don't know that I really got an answer there. I mean, you're going to have to generate positive cash flow to hit that target, I mean, when I look at the numbers, the debt level went down by what was transfer, the cash went down as well, which shows significant use of cash in the quarter and to reverse that, which you guys have been pretty straight forward, saying here first half is going to burn cash, second half will generate cash.

I guess, if I just, in a very static way took what I think is a reasonable recurring EBITDA level versus what the net debt is today, I come up with the four times level and we're just going to have feed the positive cash flow. So I guess you're going to have to prove everybody, to everybody, that what your kind of outline is going to happen, which is fair?

My second question just has to do with for the export market for Brazilian beef. You talked a bit in the press release and in the commentary about some of the irrational pricing, also it look like export prices didn't really keep pace with the BRL depreciation. Could you just discuss a bit how that's going to react in the current quarter, anything is changed already that you could talk us about, have you been able to pass through the BRL decline in your export prices and if the market is behaving in a more rational way and why?

Sergio Rial

Let's start with capacity utilization. Our capacity utilization in beef in Brazil, in particularly, it has moved up to 73% to 74%, relatively high when compared to the recent quarters. That's point number one. Point number two, we are seeing no pricing pressures in Brazil related to domestic sales, much of the contrary that we've been able and the factors we don't enable to raise prices. And externally prices have stayed stronger.

So I would expect even us capturing a little bit more margin out of the export markets in a smart way. But the real question here it's all about not so much irrational behavior towards pricing, but irrational behavior towards slaughter. So this is the business that is very volume sensitive.

So yes, it's fantastic to have all your plans running at 100% and do good, but if that's not generating cash, because your cash cycle is very perverse, you not really generating a lot of value, but the industry and beef packers, in general, doesn't they're aware have always paid a lot of attention to volume. And I think in the case of Brazil's first half particularly not only the leader, but the leader have some increased slaughter capacity. Remember during the acquisition of (inaudible) and a couple of other assets have almost added another Minerva into JBS, forsake, so there has been a lot of consolidation in Brazil for that matter.

So now part of your question, going forward, so what I think JBS is more motivated now with the acquisition of Seara to pay a lot more attention, not if they weren't and not implying that that to be a lot more rational in terms of S&D planning in their beef business, that's point number one.

Point number two, we do have a different reality from a dollar barricade with the riyal, which I think the riyal will most likely continue to depreciate, but in the very structured manner, but still go in the right direction. I do see particularly in international markets and our infrastructure internationally to give us a bit of an edge to position the Marfrig beef products smartly. Now, particularly from a cost-to-serve point view, whether it's in Europe, whether it's in Asia.

We are actually today, our Uruguay business, is profiting from significant beef supplies into Keystone in China and in Asia, overall. So some of the things I think we should see more. But I'm comfortable with he second half. I am absolutely comfortable with the second half. On the first part of your question, maybe we did not understand what you wanted to say. This group has never generated free cash flow positive in its recent history. Never is not a right word, but in its recent history.

So you are absolutely, is what we do is not what we say. My only point there is the debt that we are transferring R$5.85 billion of debt that without a doubt. That's the price of the Seara. The risk here is too many moving parts of discontinued operations, there are still R$3 billion to be transfer, but R$1 billion net debt have gone. So I understand when you start summing up all of that, I'll say, is it 3.8 or what I can tell you that R$5.85 billion is gone. Another important point, of the R$5.85 billion, which was the price JBS paid, R$3.2 is basically debt in foreign currency.

Net debt in foreign currency got basically we locked at the exchange at 2.12. So on 3.2 of foreign currency debt, that it's part of JBS price. It's basically price and locked at R$2.12 billion. So there is a pretty significant tailings that I think we have been able to give to Marfrig shareholders, because the riyal is moving at 2.30, 2.31. So you can go through the map how much we say. It's important that we stop, because we were particularly smart, that because as with the riyal did values, the potential operational games into Seara will be for the account of JBS.

So it would be an even transaction, what we think that hit on the debt and then they take the benefit on the operational performance. So we are now also taking, if you will, the hit on that piece, which is important. But I think take the $5.85 billion as the definite number. I think that should facilitate understanding.

And from a free cash flow point of view, I think 2014 it's a better year than the half of 2013. Are we going to use last cash in the last half of the year? Sure. We're going to be a smaller groups, Keystone and Moy Park doesn't take a lot of working capital. Who takes working capital as Brazilian beef? That's what takes, but significant less than the combination of Seara in Brazil beef.

So if we do, if we improve the way we manage our cap cycle I think we can be a lot more effective from a cash generation point of view. But don't expect free cash flow generation in 2013. There are so many moving parts happen, but do not expect what you have seen in the recent history of Marfrig either.

Operator

Our next question comes from Mr. Jose Yordan with Deutsche Bank.

Jose Yordan - Deutsche Bank

Couple of questions. You had mentioned in the past, I forget if it was in the fourth quarter or first quarter that Moy Park was operating with double-digit margins, and obviously that that wasn't the case in the second quarter. So I was wondering, if that's due to seasonality of those two quarters or whether that was just an exceptionally high number when you did mention it.

And I would like to also reiterate or ask you the question, not just what you'll release first quarter pro forma data for the assets going forward, excluding the same basis that we have in the second quarter, but whether you're going to be disclosing that for the fourth quarter of last year, as you had done already when you did the first divestment last year?

And then my second question was what's the impact of corn price decline on Keystone given that some of it is cost plus, I guess that's another way of asking what percentage of your business at Keystone is on cost plus basis today?

Ricardo Florence

When I mentioned about double-digit I was referring to Keystone Asia, and particularly China. So we do have, and abstractive from the AI event, that in a more normalized quarter, Keystone China has been growing between 9% or 11% EBITDA margin. That's Keystone China. In China, we sell roughly R$400 million to R$450 million with the possibility now to grow that faster. So that was Keystone China. For Moy Park, the peak we had once was 9%. So we never got the double-digit and even if we get Moy Park to 7.5%, that's a pretty significant margin expansion and I think it's dual.

So I apologize, for whatever reason you got interrupted as being Moy Park, but it was Keystone Asia, and particular China. We will not put the first quarter, and the reason is these are really big moving parts as you can overall imagine. I mean, we have to report Seara as a discontinued operation, because the deal is done, it's sold. It's technically, yes, subject to the approval of CADE, but from an accounting point of view has to go out, so we wanted to avoid a lot of work that because, first it's not going to be heading a lot of value, but it does add value for comparison purpose, I understand that.

But hopefully the coming quarters are going to be enough to establish a trend about what the remaining part of group is going to be. So we have a lot of discussions about, we feel if we would even another quarter from a comparison point of view, you could actually make the whole exercise even more confusing.

Jose Yordan - Deutsche Bank

And then a question about corn in Keystone?

Sergio Rial

Keystone it's primarily 100% hedged. I mean, they don't take positions or they don't leave their corn positions open. They are actively hedging their positions, some of that they can actually, they do hedge and they have zero impact in terms of cost, because they can simply pass in through to customers and some of that they have to carry the cost and they are taking it, if you will. So they've done reasonably well. They have actually been in the money with their corn positions in the first half.

Operator

Our next question comes from Mr. (inaudible) with Merrill Lynch.

Unidentified Analyst

Sergio, just a question, looking at this scenario that we have in the second half where obviously leverage is going to come down as you transfer the R$3 billion in debt and you have a better capital structure and a much lower leverage, what are the plans on the financial strategy of the company, in terms, of maybe, engaging a liability management exercises. You have several dollar bonds outstanding and those have relatively high coupons, is this something that is already being thought in the strategic plan of the company, is it something that we can expect to this year or do you think this is more of a medium long-term story for 2014?

Sergio Rial

I think of course, we're not in control what the market is going to be, but assuming market it's in normal conditions, I think you can expect some effective liability management taking place already in the third quarter.

Operator

Our next question comes from Mr. (inaudible) with BlueBay.

Unidentified Analyst

I just had a quick question. As my first question has been answered by (Alexandro's) question. But my second question was around the cash spent in the quarter. Obviously, you had R$3.1 billion of cash in Q1, and it came down to R$2.3 billion in Q2, and I was just wondering if you give us a little more clarity around where exactly that cash went, was that in terms of working capital investment, was it interest payments, seasonality, just give us a bit more color, please?

Sergio Rial

I will give it to Ricardo.

Ricardo Florence

Going through your first question, in the quarter basically as we mentioned here, yes, this is a transition quarter, yes. The main factors we had came from the beef business in operational terms, in working capital that we had here. The only point that we had as well, we had to transfer some of the cash we had in the previous quarter. It is currently the discontinued operation of Seara that goes with the business.

And of course we have to run the operations, we were in a moment in that we were transferring debt as well as thoughts of all the operations that it had related to the sale of the Seara business. This is basically the reason of the decrease in the cash and equivalents that it had, but I would like to remind you another point. If you go at year end, what the company did to the short-term debt of the company and also taking a look into this geographic transferred debt, you can see that the coverage that you have in our cash and equivalents, it will be after debt, much better than it was in the past.

It's really of this area, I guess, that we have worked it. And I'll say it makes all sense to concentrate much more of the debt of the company in the medial and all terms instead of having it in the way that it had in three to five months of operations in the short-term. And of course, we are working and improving the cash flow through everything that we have discussed so far.

Sergio Rial

You kind of made a good point, I guess, which is there is clearly a reduction of the cash position without a doubt. I mean you can food around with the question, and I think he explained the uses, but I think what's important now is the debt profile of the company. So when you look at the release on Page 6, you'll see that it will take out of that Page 6, and other R$3 billion, you see hardly any concentration of really any significant at all debt maturities. So the present cash position it's adequate.

But the having said that, I mean this is something that as we move forward, we'll continue a little push as much as we can afford debt and increase duration, and really also not only keep cash, but keeping cash at the right level at the right location at places, where we can easily monetize cash. Because some times you can show a big cash position, but it gets trapped on the back of packs regimes or on the back of inefficient structures that does not allow the company to be as efficient from a cash management point of view.

So there is a lot of work in this space. But I think the message to the market is the company analysis in recent past, consumed a lot of cash. I mean, there is no doubt about it, and we can't fool around with the issue. And part of that without a doubt was fundamentally into two businesses, Seara number one; Moy Park and to a less extent beef Brazil.

Keystone and Moy Park are just not cash leaders and that's 54% of the group. And we still have beef, which is from a cash cycles to always a challenging business in Brazil. It's upon us to now work and improve that. But now we don't have Seara execution risk along the side. So we can't claim we're not efficiently focused to make it right. So I think the past should give the market, of course, concerns and I absolutely expect that. But the fact that we are doing such a fundamental transaction and redesign of the group, and now you are seeing the pieces, because we are disclosing them, should give you a better understanding what's the picture going forward.

Unidentified Analyst

I welcome your Q3 presentation, where you'll kind of outlay what the group is going to do going forward. The only follow-up question I had was around interest coverage. You've mentioned that you want to reduce the interest cost in relation to the company and the capital structure as it currently stands. And we welcome any sort of liability management that may happen and you've indicated that it could come through in Q3. I guess, in terms of understanding the business and understanding where you're looking to take the company structure, I mean what is an appropriate level interest coverage that you're targeting?

Sergio Rial

Looking at third quarter, where I plan together with a strategic planning, I do plan to show the market, what I call some of our financial policies or call it the boundaries we want self impose on ourselves regarding financial boundaries. So that is going to be there. I just prefer not to drop a number at this point in time. And whatever we do in terms of liability management, it's for the reasons you just called it out, I mean the spreads, right or wrong, the yields on the bonds are what they are. But there is still possibility for us to narrow that 50 basis points on the remaining total debt to a higher level, which is pretty significant, pretty significant.

Unidentified Analyst

In terms of your liability management, I mean obviously, you have a lot of liquidity in relation to your business needs currently, you cut the short-term debt like you rightly pointed out, it's very strong, especially, when you take into account what still needs to be transferred to JBS. Are you favoring more refinancing in terms of issuing a new bond and taking out your existing bonds or are you happy using some of your cash balances in relation to liability management. How are you guys thinking about it or would you prefer to preserve liquidity?

Sergio Rial

Preserving liquidity is always important and certainly also preserving the option no matter what we're going to do, it's also being part of the cash. So we are not going to be able to share with you, all it's going to be a function of use of cash. But we want to actively do it in a way that it is the right thing for the company, but it's also the appropriate thing for bondholders, who have supported the company. So expect a totally orderly instructed approach that will definitely, hopefully be the right decision for the company, but I can't tell you on which way we're going to go.

Operator

Our next question comes from Mr. Christopher Vandergrift with Hartford Investment Management.

Christopher Vandergrift - Hartford Investment Management

I had a question on constant currency revenue growth from Moy Park and Keystone. Obviously, the FX hit the balance sheet this quarter, but not fully for the revenues of those two businesses, so if you could maybe break that out and explain going forward, how that real depreciation will benefit these two businesses?

Sergio Rial

I think, Keystone, I'm not so sure, I totally understood your question. I was going to try to answer what I think I captured, if not, please just say, so that's not what I wanted to hear or wanted to get an answer to. Our Keystone and Moy Park are just growing in their respective currencies. I mean, Keystone has some exposure for sure, not some, some exposure to Asia, but Asia is a very dollarized region. So from a foreign exchange point of view, I think they are relatively neutral. When it becomes important is when you convert those revenues back to a dollar-related entity, which is Marfrig, then we certainly going to be benefiting.

So if the dollar real is 2.3 the revenue of the group is 1x. No, if it's 2.40 you have a 10% potential growth impact more than that, but you have an impact of what that revenue growth. So I think we're going to be very clear as the market is. First is true operating performance, because that's what matters, but I believe we are well-positioned as a portfolio being a real-based group, to be so exposed at this point in time to the dollar and the euro from a revenue point of view.

So I think we will be benefiting in 54% to 55% of the portfolio now in dollar, euro or sterling. But for that unit as such it doesn't necessarily benefit them. It does benefit very significantly beef in South America, because the costs are in real, and some of the revenues, in the case of Brazil, 40% are dollar denominating. So you have the best of the world. So you have shrinking cost relative to dollars and increasing revenues relative to what you do in terms of export.

Christopher Vandergrift - Hartford Investment Management

I guess what I was trying to say was, the Keystone grew 12% year-over-year. I guess, what percentage of that was organic growth versus currency depreciation in translation effect?

Sergio Rial

Organic, I think you're talking about 7%. So if you're saying, Sergio, give me the number, deducting all foreign exchange noise, you got 7%.

Christopher Vandergrift - Hartford Investment Management

And then, maybe CapEx for 2013 or maybe just the remaining few quarters, what are you expecting?

Sergio Rial

Somewhere between first quarter 2013 and second quarter 2013, but don't take that as guidance, because it isn't. We don't have a target for CapEx. Some of need is coming on the back of expansion of the poultry infrastructure in Europe. As you saw the growth of fresh poultry sales in Europe is significant, but somewhere between the two quarters, I think we'll be in a good place.

Christopher Vandergrift - Hartford Investment Management

And I guess, so that seems like roughly R$200 million to R$250 million. Are you looking at decreasing CapEx moving forward, I guess maybe that's last quarter this year or into 2014 to actually start generating free cash flow?

Sergio Rial

Not really. I mean, we can certainly use CapEx to do that, but at this point in time again, we don't have a target. We don't want to compromise good growth, particularly in certain parts of the business at this point in time. So we are certainly committed for '14 on a clear path towards free cash flow. I think second half, this too a lot of noise, because we still have to wait for the approval of CADE for Seara, although it is a discontinued operation and in the balance sheet, but it hasn't really gone to the other side completely in terms of key, right. So accounting wise it is, operationally not yet.

Christopher Vandergrift - Hartford Investment Management

So then could you breakdown maybe what's maintenance CapEx versus what might be growth CapEx to kind of get a run rate of how the business operates?

Sergio Rial

No.

Christopher Vandergrift - Hartford Investment Management

And then, I guess then the last thing would be, so if CapEx is going to be roughly at that run rate, are we going to expect free cash flow and it comes from working capital reduction and then reduction in interest expense, and that's going to be the primary drivers.

Sergio Rial

Correct.

Operator

Our next question comes from Ms. (inaudible) with Schroders.

Unidentified Analyst

I was wondering if you could talk about the notes payable and there has been a significant increase over the last quarter related to line item to JBS for about R$400 million, can you explain what that is.

Sergio Rial

So it's your question related to?

Unidentified Analyst

On the balance sheet the notes payable balance has increased significantly and it's related to a new line items to JBS, in the amount of R$400 million, I'm just wondering what that is specifically?

Sergio Rial

So remember in the transaction design we told the market that there would be, sort of, a down payment as part of the transaction prior to the final approval of CADE. So in that account, you have what I had indicated a down payment that would happen minus what we already got from the divestiture of Zenda. So the lever operation Zenda it's already gone. And you see the capital gains related to that transaction in the second quarter of 2013 and the remainder of that you see in the account is the difference.

Unidentified Analyst

So that amount is only payable to them if you did not receive the approval?

Sergio Rial

Yes. Which is for us a risk that does not really exists.

Unidentified Analyst

So that note payable balance will decrease by that R$400 million once the approval is received?

Sergio Rial

Absolutely.

Operator

This concludes today's question-and-answer session. I would like to invite Mr. Sergio Rial to proceed with his closing statements. Please go ahead, sir.

Sergio Rial

So again, thanks for you all to be here. Hopefully, this is another quarter in the right direction to the company, significant transaction has taken place hopefully, yes. We take very seriously what we hear, maybe, what I heard also is that probably some of you would have appreciated to see more comparisons of the second quarter given the first quarter. I think heard that from the couple. We will certainly trying to minimize confusion for a quarter, but it's already pretty challenging to articulate, so that you can clearly see what's operating and what's non-operating and decoupling of the Seara items and accounts.

But definitely, I think, I am very and I can speak on behalf of entire management team very confident that the discloser that we are providing to the marketplace will bring to us the right level of pressure and the right level of question. We still have to spend a lot of time on capital structure, which is appropriate.

Hopefully, we will spend more time in the quarters to come on performance, margin, particularly margin expansion that we can give the market the right confidence that this is a team committed to and to basically carry growth within a solid capital structure, but definitely paying attention to margin expansion in all the three businesses. That is where we're going to be focusing on the quarters to come.

We are not working on any particular, all the strategic transaction. And I also say focus will be organic growth. But I think it will be inappropriate to say in the years to come, not necessarily 2014 per se, but in the years to come that you would not be expecting some transactions that would allow us to grow even faster without compromising our discipline around capital structure.

With that, again for those who have been supporting Marfrig for a long time, thanks for believing in us. Thanks for staying around with us and we certainly need your help and your support in the quarters to come. You're a big reason for us to come here everyday believe it or not. Thank you very much.

Operator

This concludes our Marfrig's conference call. Thank you very much for your participation. And have a good day.

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