Sigma Foods, S.A.B. de C.V. (SIGMAFA) Earnings Call Transcript & Summary

Good morning, and welcome to ALFA's business update conference call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, please go ahead.

Thank you, Melissa. Good morning, everyone, and thank you for joining us on short notice for a discussion on ALFA's proposed spin-off of Axtel. Additional details can be found in our press release, which was distributed yesterday along with a summarized presentation. Both are available on our website in the Investor Relations section. It is my pleasure to participate in today's call together with Eduardo Escalante, ALFA's CFO; Carlos Jimenez, ALFA's Senior VP of Legal and Corporate Affairs; and Adrian G. de los Santos, Axtel's CFO. Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. I will now turn the call over to Eduardo.

Thank you, Hernan. Good morning, everyone, and thank you for joining us today. Yesterday was an exciting day at ALFA with the announcement of a decisive step forward. We remain fully committed to transferring value to our shareholders by following a balanced approach that includes cash dividends, share buybacks and, most importantly, our transformational efforts to address ALFA's conglomerate discount. As you have heard on our quarterly call, we have made significant progress at strengthening our balance sheet, posting sequential improvement in the consolidated net leverage ratio every quarter since 4Q 2020. This is a key metric as we strive to simplify our conglomerate structure. Since we announced the beginning of this journey, our businesses have also grown stronger and implementing initiatives to boost their underlying value, such as the Octal acquisition by Alpek. In addition, our comprehensive efforts include enhancing business independence after the Nemak spinoff. Nemak recently formed an advisory board and ALFA corporate expenses are rapidly decreasing as shared service capabilities are transferred to the operating subsidiaries. The proposed spin-off of Axtel is yet another game changer event in ALFA's path towards reaching its full value potential. Despite strong fundamentals and operating performance, ALFA's valuation continues to be penalized with a high conglomerate discount. The announced transaction further simplifies ALFA's corporate structure. Therefore, we expect it will contribute to unlock the company's extraordinary underlying value. As we advance, ALFA's shareholders gain autonomy, holding their current ALFA shares plus separate stakes in Nemak and potentially Axtel. In addition to unlocking value at the ALFA level, we believe this is also an attractive news of maximizing value for Axtel shareholders. As a fully independent business, Axtel should be valued on its own merits and growth prospects. Similar to the other ALFA subsidiaries, Axtel has demonstrated its ability to operate fully separated from the parent, establishing a strong position in its industry. Over the years, the company has assembled the largest neutral fiber optic network in Mexico, effectively adapted its service offering to evolving customer needs and successfully monetized noncore assets and legacy businesses. Axtel has an extremely talented team to build up on its solid track record, driving strategic alternatives to boost growth without the overhang from ALFA's transformational process going forward. Let me now provide a quick overview of the proposed transaction, which is virtually the same structure and process followed for the spin-off of Nemak in 2020. The ALFA Board authorized and recommended the proposed spin-off to be executed by forming a new entity called Controladora Axtel as the spun-off company and listing its shares on the Bolsa Mexicana de Valores. ALFA would transfer its entire share ownership of 53.9% in Axtel to Controladora Axtel. ALFA shareholders would receive 1 share of Controladora Axtel for each of their ALFA shares and maintain their alpha shares. For reference, this is the same process we follow during the Nemak spin. Under the proposed spinoff, Axtel's Board of Directors and management would remain the same, and the company will continue getting all our support to ensure a smooth transition. Once the spin-off is completed, ALFA will no longer have an equity ownership in Axtel. Instead, ALFA shareholders would gain full autonomy regarding their stake in Axtel just like they did with Nemak. A few comments on timing. This process formally kick off with the announcement calling for ALFA's extraordinary shareholders' meeting issued yesterday. The meeting and potential approval of the proposed spin-off by ALFA shareholders will take place on July 12. The spin-off is also subject to customary contractual and regulatory approvals or notifications. Among other requirements, Controladora Axtel will need to complete a registration and listing approval process in the Mexican Banking and Securities Commission, CNBV. Upon completion of the CNBV process, ALFA would issue a share distribution notice to shareholders and distribute the new shares. ALFA will work with all the relevant parties to complete the spin-off process as soon as possible. As a reference, the Nemak spin-off took approximately 4.5 months from the call of the extraordinary shareholders' meeting until the first day of trading of Controladora Nemak. Summing up, we remain fully committed to advance in the successful execution of ALFA's orderly transformation by maintaining a consistent and balanced approach. As always, we will keep the market informed as important developments occur. Thank you very much for your interest. This concludes my remarks. I will now turn the call back to Hernan.

Thank you, Eduardo. We can now begin the Q&A session. Operator, please instruct participants on how to place their questions.

[Operator Instructions] Our first question comes from the line of Andres Coello with Scotiabank.

Two quick questions. The first one is, why are you creating an intermediate vehicle to distribute the Axtel shares? Why not distributing the Axtel shares directly to the ALFA shareholders? I just want to understand the mechanics in the decision of listing a temporary vehicle? And my second question is if this proposal changes in any way Axtel's intention to monetize the infrastructure or other assets? Or if the M&A processes will continue in place?

Thank you for your question, Andres. Let me ask Carlos to answer the first part of the question.

Andres, the rationale behind the route that we decided, which is what is called in Mexico as [foreign Language], the closest thing, it's a spin-off in English. It's the route that it's contemplated by the law, the Ley General de Sociedades Mercantiles, which is a corporations law in Mexico as well as the securities laws. So we thought that the best route for us and for our shareholders was the route that was contemplated by the law without looking for other potential routes that will not have completely ground on the laws and regulations of Mexico.

And let me ask Eduardo to answer the second part of your question regarding Axtel's intention to monetize assets, Andres.

Thank you, Andres, for the question. Let me tell you how we see the process from Axtel's point of view, including the monetization aspect of it. We think the independence from ALFA for Axtel and in particular, the independence from this unlocking value process has a significant value and flexibility for Axtel as it eliminates the overhang for the -- from the sales status that it had. I think Axtel will be now in a position to pursue strategic alternatives to boost its own growth, significant opportunities that we find today in the market. In the last few months -- as we discussed in the last call, in the last few months, the negotiations for the outright sale evolved towards active discussions for potential partnerships in some high-value added services in the telco industry between Axtel and some interested investors, for example, in cyber security and cloud. So -- the way we see it, that is the main avenue going forward for Axtel. Having said that, if there is still investors' interest in buying important portions of Axtel that would be now an issue for Controladora Nemak, not for ALFA anymore, it would be at the time a negotiation and a decision by Controladora Nemak and its own shareholders. Controladora Axtel, I said Controladora Nemak -- sorry about that.

Our next question comes from the line of Jamie Nicholson with Credit Suisse.

I'm wondering if you've had any recent discussions with your rating agencies about the implications of the spin-off, in particular, if you think it could cause a triggering event at Axtel and if there's any implications in terms -- from a ratings perspective for ALFA?

Sure, Jamie, and thanks for the question. And I will make some comments regarding it, and then I will turn it to Adrian also to address the Axtel side. Yes, we did. We have had conversations with the rating agencies. Both ALFA and Axtel were present in those conversations. I think the proposal was well-received by the agencies, judging by the reaction. We do not foresee any change in ALFA's ratings since Axtel represents a small portion of our results, and we continue having Sigma and Alpek within our portfolio. And furthermore, we have expressed our commitment to maintain our investment-grade ratings for all 3 parties, ALFA, Alpek and Sigma. On the Axtel side, my read is that Axtel was already evaluated mostly as a stand-alone operation since we announced the starting of this restructuring process in ALFA 2 years ago. So from my point of view, we do not foresee any change in the ratings. But let me turn it to Adrian to see how he sees this process.

Jamie, we have continuous conversations with rating agencies every quarter. We review the performance and results. We had, together with ALFA, meeting prior to the announcement, and we will continue conversations with the information as it comes out. And obviously, in July after we have the second quarter results. In our view, Axtel has been evaluated as a stand-alone company. Nonetheless, we will continue with the conversations and have that open dialogue as always with trading agencies.

Okay. Great. And then just to clarify, what is the time period following the completion of the spin-off during which there is a potential for a triggering event? What's the time period that you have to avoid a downgrade? Is it like 30 or 60 days.

Could you repeat the question, Jamie, please?

I was just wanting a clarification on if there is a triggering event for a change of control for a ratings downgrade, like when would the ratings downgrade have to happen? Would it be within 30 days of the spin-off or 60 days of the spin-off? I'm not exactly clear how the triggering of that language works.

Jamie, we think it's a 30- or 60-day period. Let us get back to you on that.

Our next question comes from the line of Jean Bruny with BBVA.

Just maybe a quick one on the -- what picture on your making value strategy? And maybe what will be the following steps. My understanding was when you presenting the strategy back in 2020, you wanted to monetize on Axtel sales in order to reduce your holding debt. My understanding is that it's not going to take place. So what will be next, probably after focusing on the Axtel spinoff maybe 2023, what can we expect? What the measures are you going to take in order to reduce the debt? And if we can have an idea on the spin-off of Alpek, which would be after that?

Sure, Jean, thank you for the question. We plan in ALFA to take full advantage of optionality and timing flexibility. Let me first say that we do not have a specific time, no time has been set for any next step. We think the extraordinary results from Alpek provide ample flexibility to define the next steps. Having said that, it is important to mention that ALFA remains fully committed to maintaining a consistent progress on all 3 fronts, strength is -- strengthening our balance sheet, enhance the business independence of our subsidiaries, regardless if they are still within the portfolio, and to strengthen the businesses. And we'll continue working towards that. What to expect? I think you should expect, first of all, to have ALFA early and foremost, fully focused on successfully completing the Axtel spin-off. It is important for us that as we did with Nemak, this is successful both for Axtel as well as for ALFA and the shareholders of ALFA are satisfied with the process. Second and also very important, ALFA is fully committed, as I already mentioned, with the investment-grade rating both at ALFA as well as Alpek and Sigma. So we will do -- we will not do any move that puts pressure or put the IG ratings at risk. We plan to follow a balanced capital allocation approach regarding the unlocking value process. And that includes the debt reduction at the holding level as well as continue transferring value to our shareholders via dividends and buybacks as we have done this year -- so far this year. We will provide information on next steps when we have some definite determination. But again, we do not have a time set for spinning off Alpek or doing anything else. We will continue working together with our board in analyzing what the best next steps are in order to unlock value and transfer it to our shareholders.

Very clear. Just maybe a quick follow-up. You mentioned in your filings that you expect a tax benefit of about MXN 4.3 billion, if I'm not wrong, from the spinoff of Axtel. What does it mean exactly for you? I mean, how can -- when can we expect this impact? And I believe it's noncash. So if you can just go through this very quickly.

Sure, sure, Jean. Yes, the spin-off is considered the equivalent of a sale for ALFA per Mexican tax code. There is no tax impact for Axtel. So it is only -- only the ALFA side is impacted. As you mentioned, we do estimate that the spin-off will result in a taxable loss, which will become a deferred income tax asset. At this time, we cannot be certain the amount of the loss since it will depend on the price of the Axtel shares on July 12, if and when the spin-off is approved and executed. So when we presented the MXN 4,300 million, it's an estimate using the share prices of Axtel for the last few days. So it really will depend on what happens going forward. And as you mentioned, it is a noncash item.

Our next question comes from the line of Alejandra Obregon with Morgan Stanley.

It's actually a very simple one regarding Sigma. Can you remind us of your covenants for the debt in Sigma? And particularly, can you elaborate on the first maturity that if I'm not mistaken, it's close to EUR 700 million in 2024. Do you have any plans or are perhaps thinking of refinancing these first maturity for 2024 at the Sigma level?

Thank you for your question. Give us just one second.

Thanks, Alejandra, for the question, and we took some time to look up on some of the information since. Honestly, we were not expecting question from Sigma, but let aside your best. Yes, the first significant maturity that we have in Sigma is a bond, 144A bond that Sigma has in euros, roughly EUR 600 million. And we are already working towards the refinancing of this bond. Today, we are looking at both options, do a bond either in euros or in U.S. dollars. And also, we are looking at the alternative of doing some financing, the renewal through some bank and other financial loans. We still haven't decided how we are going to move forward. Certainly, these are volatile times regarding the cost of money. So we'll continue working -- we'll continue working on that. We expect to have something and be able to inform you within a few weeks. We haven't made the decision. Regarding the covenants, we continue working with Sigma to maintain the net leverage below 2.5x. That is our target. And that is well below the bank covenants that we have. So we do not expect any problem soon.

Our next question comes from the line of Alejandro Chavelas with Credit Suisse.

Congratulations on the announcement. Just 2 questions. One is, why now? Why specifically now the Axtel spinoff? Is it just that the tax opportunity was there and this was the right time to take it? Or did you also feel that there was an opportunity from the market side to recognize the recent sum of parts? Like what's your thinking behind the timing. And the second one is clearly now deleveraging will come from the cash flow generated from Sigma and Alpek. So I was wondering if you perhaps now under this new plan, do you have an idea of how quickly the company reduce leverage in the following years, like any targets that you have to reduce leverage at the corporate -- at the holding level now that you have a clear view of what's ahead?

Sure, Alejandro. Regarding timing, we thought this was the appropriate timing since -- first of all, we were unable to monetize the company. As you know, we have been trying to do so. So since we were not able to do that, we look at this other option. And also, we feel this is the appropriate time for Axtel, the management -- the senior management is in place already. And they are ready to start working on some strategic projects in order to retake the path of growth in Axtel. So we decided for those reasons that this was the appropriate time. Certainly, we still have significant pressures in ALFA, given the very large conglomerate discount that we continue having for ALFA stock price. In our own calculations, the ALFA price has a discount versus the sum of the parts of roughly 45%. So that continues putting pressure into our process. And we'll see what happens going forward. We think this is a positive move both for ALFA and Axtel and hopefully, our stock price can react positively to it. Regarding leverage for ALFA, I think the rate by which we will be able to decrease the debt at the holding level will have a lot to do with how we balance the approach between reducing debt, dividend payouts as well as buybacks. We haven't decided. Our board has not decided the rate of which these different variables will be going forward, but we plan to move with the three, as we have been doing for the last few months. We have been able to achieve a reduction in terms of the net leverage at a consolidated level in ALFA. The last quarters -- in fact, every quarter seems end of 2020. And we have also been able to pay $196 million in dividends this year as well as do buybacks for 62 million shares year-to-date. So again, it really will depend on how we balance these two fronts.

Our next question comes from the line of Carlos Legarreta with GBM.

This is a question, I think, perhaps for Adrian. As you know, the Axtel stock will likely face an overhang after the spin-off, not because of the forward selling. And I just want to know if you guys are willing to exercise the share buyback fund to prop up the price of the stock and if there's any intention of increasing that down the line?

Carlos, yes, we always analyze the market conditions and the availability of space under our share buyback program. If needed, if we think it's appropriate, yes, we will use our program. If any of these things, of course, there is a distortion in the market due to that, we would consider using the program.

Our next question comes from the line of Andres Cardona with Citigroup.

My questions have been asked.

Our next question comes from the line of Alejandro Azar with GBM.

Just a quick one on dividends. At the same time that you have increased dividends at the subsidiary level, you have increased it at ALFA and all the leverage of the holding net debt has happened during that time. Is ALFA willing to cut its dividend in the next year to have a better or a healthier balance sheet or a better chance to decrease the holding net debt? And the second one is from your point of view, what is the target or the net leverage ratio that Sigma as a stand-alone entity, including the holdings net debt should have for you to proceed with an Alpek spin-off?

Thank you for the questions, Alejandro. Regarding next year, the dividends of ALFA next year, no decision has been made. I think it really will depend on -- first, on the results of Alpek and Sigma this year and next year. If Alpek, as we expect, continue with very good results, that gives us flexibility going forward, and we do expect also Sigma to have positive results next year. So that would be a function of those results. And it would also, as I already mentioned, it would also be a function of how our board decides to balance the debt reduction at the holding level as well as the dividend payout for ALFA and buybacks, which, of course, the buybacks depend on the stock price of ALFA going forward. So it's really too early to tell, and we'll continue working towards analyzing the best alternative for our shareholders. Regarding the target, today, the target for Sigma is to be below 2.5x net leverage. And that is the same target we expect to maintain when and if any move regarding Alpek is done in ALFA. We will never put significant pressure on Sigma, doing a move with Alpek. We will be extremely careful and committed to maintaining Sigma in a very healthy level. I would say 2.5x.

Eduardo, one more if I may. Should we think that the spin-off of Alpek should be expected as soon as, I don't know, March 24, when your [ 500 million ] bond matures? Or are you thinking to refinance that bond now that you are not monetizing assets in a sale as one of your alternatives?

I wouldn't comment on a time. It would be inappropriate since we do not have time set for anything regarding Alpek. But what I can tell you is something that we are looking at in the case of the ALFA bond is to at least partially have been able to achieve flexibility regarding the financing of it. We think it will have value to have flexibility in order to refinance that and be able to do prepayments going forward. Having said that, the other possibility that we have been exploring is to refinance the bond with a new bond and then in the future, look at the opportunity of Sigma, reducing its own debt. And then in the consolidation of Sigma and ALFA, have Sigma served both bonds, the new bond as well as the 44A that we have in ALFA. Again, every option is being analyzed.

Our next question comes from the line of Alejandro Gallostra with BBVA.

Question about Axtel probably for Adrian. Now that the sale of the infrastructure business has proven difficult, have you -- or will you consider spinning off infrastructure business directly to capture the real balance on this type of businesses in the market or otherwise what would be the point of maintaining the service and infrastructure business altogether in Axtel?

Alejandro, we will focus, as Eduardo mentioned, in looking to growth in segments, in services that have proven to be attractive that are double-digit growth expectations. At this moment, we don't expect to separate the 2 business units. We will keep them under Axtel. The -- any spinoff or similar will have implications, including tax implications that are material. And second, the relative size of the 2 businesses as public entities will be small. And we think that together, the two business units under Axtel can provide the support and the combination to growth in existing and new avenues of services that we are exploring.

A quick follow-up, Adrian. So spinning off infrastructure business will prevent you from pursuing those growth opportunities. So how would you pursue those opportunities if you had sold this infrastructure business?

No, I'm not referring to divesting or selling the infrastructure business unit. Both business units will be under Axtel. That's our plan today.

Our next question is a follow-up from the line of Jean Bruny with BBVA.

Just reckon, particularly, can we expect the results you're going to publish in July to include or not include Axtel?

Sure, sure, Jean, and thanks for the question. The results that you will see at the end of the second quarter will have no change. They will not reflect the spin-off of Axtel. And the reason for that is that according to IFRS, since the approval is expected to be on July 12, and that is after the closing of the books of the second quarter, the changes in financial statements of ALFA will be reflected in the results of the third quarter.

Seems that there are no further questions. Let's go back to Mr. Lozano. Go ahead.

Thank you, Melissa. Let me just give a couple of other questions, a few other questions that came in via our webcast that haven't been answered in the other sections. So the first one is coming from Clémence at IVO Capital. And the question is, do you still plan to help Axtel in the refinancing of their 2024 notes?

Thanks for the question. We really see no difference with the refinancing of Axtel's notes, having Axtel within ALFA or outside ALFA. We will -- first of all, we will continue supporting Axtel, helping in any way we can. But as I mentioned before, Axtel was relatively independent from ALFA and considered a stand-alone operation regarding some credit risk. So I really don't see any difference. I don't know what's your opinion, Adrian, but I think Axtel will continue working towards the refinancing as they have been doing regardless of the spin-off.

Yes. And I think that's one of the questions on the webcast. We have almost 2.5 years apart from the maturity of the 2024 notes. We are analyzing debt maturity with the possibilities to refinance with bank debt. Conditions today are not prime for refinancing with the new bond. We expect this uncertainty to calm down towards the end of the year. And we will continue monitoring and deciding what's best in terms of cost and tenor for Axtel regarding the 2024 notes.

Thank you, Adrian. And I believe this would be the last question coming from the webcast. And this is from [indiscernible] with RGA Reinsurance. And the question is, what will happen to Axtel's debt?

There's really no change for -- regarding the debt of Axtel. The spin-off will be of, as we said before, of Controladora Axtel, which will own the shares that today ALFA has of Axtel. So there's really no change regarding the debt position of Axtel. And going forward, as we mentioned in the previous question, we don't see any change.

Thank you. Thank you, [indiscernible]. Given that we have no further questions, I would like to thank everyone for their interest in ALFA. In case you have any additional questions, please feel free to reach out to us. We would be pleased to assist you. We also extend our best wishes to you and your families to stay safe and healthy. Thank you very much for joining us today. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.