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

Good afternoon and welcome to Alfa's First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. Now I would like to turn the conference call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano you may begin.

Thank you, Sherry. Good afternoon, everyone. And welcome to Alfa's earnings conference call. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon, together with a summarized presentation. Both are available on our website in the Investor Relations section. Let me remind you that during this column, we will share forward looking information and statements which are based on variables and assumptions that are uncertain at this time. It's my pleasure to participate in today's call together with Eduardo Escalante, Alfa's CFO; Carlos Jimenez, Alfa's General Counsel; Roberto Olivares, Sigma's CFO and representatives from each Alfa Company. Before moving on to a discussion on results just a quick reminder that as a result of the upcoming spin-off, Axtel meets the definition of a discontinued operation in accordance with IFRS. We began accounting for this subsidiaries as a discontinued operation in the third quarter 2022. Unless otherwise specified, all consolidated figures referenced in this call exclude Axtel. I will now turn the call over to Eduardo.

Thank you, Hernan, and good afternoon, everyone. We greatly appreciate your participation today. First quarter 2023 was in line with our expectations, reflecting a solid performance from Sigma and the anticipated year-over-year decrease at Alpek. Progress continues on the transformational front with the Axtel spin-off near its completion and financial flexibility at the Alfa level enhanced via the proved redemption of senior notes. At the same time, we continue transferring value to shareholders through dividends paid in March. First quarter consolidated sales were $4.1 billion and EBITDA was $376 million, keeping us on track to achieve 2023 guidance. Many of the temporary tailwinds that drove record Alpek performance during 2021 and '22 have returned to normal levels. These factors include ocean freight rates and global return margins among others. As a result, Alpek reported 12% lower revenue and a 59% decline in EBITDA. Adjusting for extraordinary items, Alpek's comparable EBITDA was down 38%, reflecting the normalization of macro drivers and soft demand and in a slowdown in certain sectors. It is important to note that extraordinary items correspond primarily to $14 million in nonrecurring costs associated with the shutdown of the PET resin operations at the Cooper River site in South Carolina. Alpek is keen at continuously improving cost competitiveness across its operations to enhance its leading industry position. The Cooper River shutdown is part of the company's comprehensive efforts to strengthen its core business, driving estimated annual savings of $20 million dollars and improving capacity utilization by transferring PET production to other sites. I will now turn the call over to Roberto Olivares, Sigma's CFO, to let him discuss the Company's strong first quarter results and progress on strategic initiatives. Please, Roberto.

Thank you, Eduardo, and good afternoon, everyone. I'll begin with an update on our quarterly financial and operational results and briefly mentioned a couple of noteworthy developments regarding the execution of our business strategy. We began 2023 with a strong first quarter as consolidated revenues reached $2 billion, making this our highest quarter yet, up 16% versus 1Q '22. Revenues reflected growth across all regions and were driven by price momentum, a slight increase in consolidated volume as well as the appreciation of the Mexican peso. In Mexico, solid demand for our products translated into a 6% volume increase year-over-year, which more than offset the lower volume in Europe and made operational adjustments in response to market conditions. Consolidated EBITDA rose to $192 million, a record first quarter figure, up 19% year-on-year that was due to the payroll performance in the Americas. In Europe, we made significant progress in mitigating the impact of inflationary pressures. Revenue management initiatives included a 29% average price increase in local currency. Moreover, energy prices have come down from their peak levels in 2022. However, current industry dynamics continue placing pressure on meat raw material and other input costs. We remain focused on improving profitability in the region through targeted top line actions, together with cost and expense reductions. Moving on to strategic initiatives. We advanced in our efforts to expand capacity in the U.S. during the quarter. We signed an agreement to acquire a food production plant in Iowa that is uniquely positioned to better serve our customers from a supply chain standpoint. As a result, the operational network in the U.S. will consist of 7 production plants. In addition, we conducted an equipment renovation project to increase capacity at our Altus facility in Oklahoma. These actions will help us to continue to grow in the region. During the quarter, we established the Administrative Efficiency Office to strengthen the generation of cross-border synergies, centralized noncore processes and foster best practices across the regions. This office will consolidate activities to improve the spending efficiency, maximize outcomes for processes and ensure optimal performance. Our goal with these efforts is to improve the company's competitive position and provide resources necessary to continue exploring the future, launching new business models and developing novel categories. As we strive for sustainable long-term growth, we are encouraged by the improvement achieved by the more than 260 employees who are part of our sustainability community and the many more that are responsible for executing the various ESG initiatives. As of the end of the first quarter, Sigma's CDP supplier engagement rating improved to A-, a multi-step increase that reflects the actions underway in our value chain. Our climate change and water results were affirmed at B rating. In addition, our Sustainalytics ESG risk rating improved to medium, a one-category increase from our previous rating. These results evidence our care committed to sustainability and increased transparency and disclosure we have sought to achieve. We are confident that our proactive approach when facing challenges, the capitalization of lessons learned and the structural changes underway, will better position the company to capture opportunities and deliver continued value to our stakeholders. Thank you for your attention. I will now turn the call back to Eduardo for additional comments and closing remarks.

Thank you, Roberto. We have come a long way over the past few years following a disciplined and methodical approach to unlock Alfa's fair value potential by efficiently simplifying its corporate structure. Since we announced our plan in 2020, Nemak was successfully spun-off. Axtel will soon be a spun-off. Alpek and Sigma have gained autonomy from Alfa-related services and corporate expenses have significantly decreased. Most importantly, Alfa has a firm commitment and a unique position to continue this orderly transformational process in a flexible time horizon. Our focus is on finalizing the Axtel spin-off and on finding the most efficient path ahead. In our shareholders' best interest, this involves an exhaustive analysis. From a financial standpoint, we must ensure a strong position at Alfa, Alpek and Sigma in any step forward. Hence, it is crucial for Sigma to resume growth and improve its leverage ratio. We have also been vocal about our view that the process requires a significant reduction in debt at the corporate level. Fortunately, the combination of Alfa's value asset base and its businesses' a strong cash flow generation, present various opportunities to reach our goal through organic and inorganic means over time. During the first quarter, we successfully put in place a more efficient basis for the required debt reduction. We redeemed $500 million in senior notes due 2024, by obtaining multiple long-term bank loans, which are pre-payable at any time. As a result of this transaction, Alfa gained crucial flexibility with respect to the timing and size of future debt repayments. Regarding the Axtel spin-off, we remain actively engaged with the Mexican Securities and Banking Commission as well as other relevant parties. The required registration process reached an advanced stage following a series of productive interactions since our last conference call in mid-February. We look forward to soon being able to list Controladora Axtel, which is the entity that received Alfa's controlling stake in Axtel and will be distributed to Alfa's shareholders. We have been diligent in following a balanced approach towards capital allocation, combining dividends, CapEx, debt reduction and share buybacks. In March, as approved by shareholders, we paid a cash dividend of $0.02 per share, which is equivalent to approximately $96 million. Alfa intends to make a second dividend payment before year-end. The Board of Directors will determine the feasibility to do so as part of its regular capital allocation analysis during the year. This kind of flexibility related to the size and timing of dividend payments is aligned with Alfa's balanced approach. We will continue implementing a transformational efforts by maintaining a disciplined transfer of value to shareholders in the short term. Let me close with a brief comment on 2023 guidance. We are on track to achieve the consolidated guidance we laid out during our last call. As a reminder, we expect consolidated revenue to be $17.4 billion, and comparable EBITDA is projected at EUR 1.6 billion in 2022. However, Alpek revised down its CapEx guidance by $110 million. Considering a longer-than-expected time to analyze investment optimization opportunities and complete the internal approval process for certain projects. Therefore, Alfa's guidance was adjusted by the same amount resulting in consolidated CapEx of $622 million for the year. This concludes my remarks. We are now available to take your questions. Please Hernan.

Sure. We would like to begin the Q&A session with questions on Alfa. Eduardo, Carlos and I will take questions on Alfa or corporate matters. As a reminder, Sigma, Alpek and Axtel will be available to answer individual questions later in the Q&A session. Sherry, please instruct participants to queue for questions on Alfa.

[Operator Instructions] Our first question is from Rodolfo Ramos with Bradesco BBI.

Just one on Alfa and maybe there's a little bit of overlap with the Sigma, but let me kick off with one on unlocking value on your unlocking value initiative. I just want to see this performance on Sigma during the quarter was certainly a good surprise. On the other hand, you have Alpek's performance, at least on the operation, but also the share price has had a significant correction. Just wanted to see how do you -- how does these 2 factors, now the fact that you have a stronger sigma, which was something that you wanted to see before moving ahead in the rest of the steps in this unlocking value initiative. And also the lower value that Alpek is now commanding. How does this perhaps influence your time line as in regards to your unlocking value initiative? That would be my first one.

Yes. Thank you, Rodolfo for the question. [indiscernible] the performance of both companies is important for the future steps of the unlocking value process. Certainly, the improvement in Sigma's results are very -- very helpful. And regarding Alpek, even though we had a decline in results, as we mentioned and it was extensively discussed in Alpex's conference call, the position of Alpek continues to be very strong. Net leverage of Alpek is 1.8x. So we still have confidence that going forward, both Alpek and the improved Sigma will help us to support the next steps regarding the unlocking value process.

Perhaps just maybe I wasn't specific enough. I was referring a little bit on the Alpek's side. Obviously, we all want Alpek to do well. But I mean from a tax perspective and the timing, does that influence at all how you think of the next steps?

Yes. Regarding taxes, the stock price is an important factor if it is depending on what the future steps are, there certainly in any kind of a spin-off the stock price is important regarding the tax impact. So the reduction of the Alpek's stock price has implications on both ways. We want Alpek to drive and improve its stock price, which will help our valuation. But on the other hand, certainly, it has an impact on the tax implications.

And just one last one here, and this is maybe for Carlos. Just wanted to get your thoughts on these series of reforms that are currently in discussion in Congress. Just wanted to see whether you see any potential impacts on your side? And perhaps on the labor side, I mean, this might be more for Sigma, but just wanted to see whether you see your business or higher cost or any disruptions from the labor bill as well? And if you can comment on the others, if you see any impact, that would be useful as well.

As you probably know, there's a lot of movement around the Mexican Congress. The number of laws and regulations that are being amended or enacted because some of them are going to be new regulations and new laws. It's important they are having or they will have a potential impact on the Mexican economy. Regarding Alfa, the one that we believe is the most significant is something that is quite new. We have not made an initial estimate of the economic impact and probably the one that you referred during the last part of your question, which is the change expected to be approved on the number of hours or days that may be workable within a week. They are being proposed to be reduced by one. So the present law says that for every 6 days of work, you have a right to rest for the 7th one. And the proposal is to have 5 workable days and 2 at rest. As you know, the change means a change in the constitution. So the process is going to be complex, you need 2/3 of the 2 chambers and then you need the majority of the state congresses. So we expect that, that discussion will start back in September when the ordinary terms initiates. And it will be competing for attention with the deputies and the senators with the whole economic package of -- the fiscal package, I mean, budgets and income tax laws and the like. So it's mostly political. At least that's my reading, but there's also, next year there will be election. So political arguments and the way that will be given to this legislation is going to be significant. Other than that, we don't expect to have any material impact on our businesses or operations.

Our next question is from Nick Lippmann with Morgan Stanley.

Essentially, my question is almost identical. So I'll, to that Rodolfo. I'll just try to change it a little bit. I was going to ask if -- to what degree it is becoming easier to do the Alpek spin-off as the stock price comes down. Can you provide any other color on the level of the stock price, which you think would be sort of a level that would materially improve the ability to spin it off? And also, if we can look at the book value equity as a proxy to -- in order to try to make estimations or estimates on when you would be able to do that.

Sure, Nicolas, and thanks for the question. As you probably know, any spin-off in Mexico fiscally is considered to be like a sale of asset. And therefore, it implies the tax payment corresponding to such -- to a transaction of that type. We do not have a specific level of stock price to determine the spin-off of Alpek fully or partially since that's only one of the factors that we take into consideration for the next steps. In addition to that, we have to make sure that every one of the parts of Alfa was the consolidated level as well as each one of the subsidiaries maintains a strong financial position before we do anything. So lower results in Alpek may make new lower stock price. But on the other hand, lower results provide less flexibility in order for Alpek to support Alfa debt reduction and to do the spin-off. So it has to be a balance. I don't think we can drive the next steps just by one of the factors. And having said that, it is difficult to have a proxy of just one of the variables.

There are no more questions at this time.

Great. Thank you, Sherry. So there is one additional question coming in on our webcast from Andres Cardona with Citi. And Andres' question is related to the potential second dividend payment and whether that is subject to Alpek distributing an extraordinary dividend level.

Sure. Let me begin by referring that Alfa intends to make a second dividend payment this year. Our Board will determine the feasibility of an additional dividend payment as part of the regular capital allocation analysis that they do during the year. If the second payment depends on Alpek paying themselves an extraordinary dividend, I would say that not exclusively. Certainly, the payout of Alfa depends on the results going forward, which are affected by Alpek's results and the Alpek's ability of being able to pay future dividends. It is an important factor, but I would say that the only element that we will take into consideration -- that the Board will take into consideration in order to define a future dividend payment of Alfa. Sigma's improvement in results is very helpful regarding cash flow and the financial position of Alfa at the consolidated level also. And those are, again, also important factors.

Thank you, Eduardo. There is another question on Alfa related to share buybacks, about our view on share buybacks at this time.

Well, that's something that we analyze on a continuous form. As you recall, we made significant buybacks in the past. And going forward, it will be an opportunistic topic regarding -- depending on the share price. We have and we will continue to follow a balanced capital approach, which may include share buybacks, but also we will continue considering, as I mentioned a second digital payment as well as debt reduction at the holding company.

Thank you. That was all in terms of questions from our webcast. So we can move on and take questions on Sigma. Roberto Olivares, Sigma's CFO, will answer your questions. Sherry, could you please start your questions on Sigma.

Yes. [Operator Instructions] We do have a question coming in from Rodolfo Ramos. We will join you through.

I just wanted to get to hear of some clarification. Can you talk a little bit about how you're seeing -- I was very surprised of the strong volume that you had in Mexico. Just wanted to see what do you think is driving this? And how sustainable do you think consumption has been? I mean we're going into an electoral year and whatnot. So -- but just wanted to see fundamentally, how do you see consumption in Mexico going forward? If you can provide granularity as to what kinds -- where do you see growth? And yes, that would be helpful.

Thank you Rodolfo for your question. So we see volume in Mexico, volume increased around 6% and about half of that actually comes from foodservice. We have seen a very strong foodservice demand as tourism continue to increase in the country, hotel occupancy and also in the cities. Also, we saw our dairy segment growing, particularly in the retail that has been growing very good in the quarter. And I would say the traditional channel, although is growing, is not growing as high as the retail.

There are no more questions at this time.

Thank you, Sherry. So we do have a couple coming in via the webcast. So the first one, Roberto is on how Sigma plans to refinance the EUR 600 million bond that is due in 2024.

Okay. Thank you, Hernan. So during the third quarter of 2022, we mitigated the refinance risk by securing or committed credit lines that will be used to refinance the EUR 600 million 2024 bond. And the resources are expected to be disbursed and utilized to redeem the bond within 3 months' period prior to the scale maturity. So that will be between November and February 15 -- November of this year and February for the next one.

Thank you. The next question is related to Europe, when would you expect better EBITDA for the European operations?

Sure. Thanks, Hernan. So we're gradually improving results through pricing actions as we -- as you saw in my initial remarks, pricing in Europe increased 29% versus same quarter last year and also cost and expense reduction. A significant portion of the EBITDA growth in 2023 that we have in our guidance is expected to come from Europe as the actions underway are reflected. Keep in mind that particularly the cost -- mean cost in the first quarter continued to increase. And as we are increasing prices in euro, will take some time to be reflected. So whenever the inflationary pressure eases, and we track -- and we catch up with price, results will benefit, and we will recover the previous margin levels.

Thank you. The next question is related to guidance, and how comfortable you feel with full year guidance after a strong first quarter.

Sure. Thanks, Hernan. So we are confident about reaching the guidance. I would say we're -- while we are encouraged by the strong first quarter result, I think it's too early to call the rest of the year. We prefer to take a conservative approach as we are monitoring potential changes in FX, in raw material and in consumer demand as well.

And I think that the next question, Roberto, is somewhat related to this, and it has to do with the peso. If there's any way in which the strong peso has changed the Sigma's strategy in Mexico?

I think, in general, the peso affects the Mexican operation 2 ways. The first one is most of our raw materials come from the U.S., thus its payable in U.S. dollar. So a stronger peso helped us to have lower raw material cost does benefit in our margin, and also the conversion effect. So the Mexican operation EBITDA is actually Mexican pesos, and we have the conversion effect that yields to a stronger result in U.S. dollars.

And final question related to pricing. Do you expect to continue seeing pricing actions in Sigma regions going forward?

I think it will depend on the regions, particularly for the case of Europe, as we are seeing cost continues to increase, particularly in meat. We will definitely continue with our targeted pricing actions in order to mitigate the impact on margin. In the case of the U.S., there's still some pricing opportunity particular to offset some pressures on labor, packaging and other raw material cost. I would say, for the rest of the regions, it will depend, particularly in how the raw material behaves going forward as we are seeing today in the -- particularly some raw material in the Americas, turkey to be specific, has started to decrease this year, thus also benefiting the margin. We -- I just wanted to mention that we take a careful approach to balance price and volume because we want to do whatever we do in terms of pricing actually helps in the long term, the results of the company.

Okay. Thank you very much.

We do have a phone question, if that is okay.

Absolutely, Sherry.

Okay. Our next question is from Alejandro Azar with GBM.

Most of them have already been answered, but you were talking about guidance. And my question is that, has something changed in terms of operations, in terms of the market because it seems that most of the outperformance during the quarter is to your guidance -- is related to FX. You had -- in your guidance, you have an embedded MXN 20, and we are at MXN 18. That's my first question. And the other one is on your plant base, your growth business unit. What can you tell us? How is this unit contributing to growth this quarter? And how are you seeing these units contributing to growth this year?

Alejandro, so first question related to guidance. I would say, besides the effect that you already mentioned that the MXN 20 versus the MXN 18 per dollar that we have. Also, we are seeing particularly in the Americas, a better raw material environment that we expected when we created the guidance particularly again in turkey. On the other side, we have a worst raw material environment in Europe, particularly in pork because of lower availability of pork given that pork producers have been losing money for the last 2 years, and thus, they are reducing the supply impacting prices. So we have those 2 effects. I would say also volume has remained solid in almost all regions, and that has also helped with regards to the result. Let me move to the second one about growth of both business units and plant based and snacking, we -- right now, sales of both plant based and snacking represents close to 3% of the sales of the group. The numbers are still -- is still low but increasing significantly quarter-by-quarter. Also our e-commerce platform and the rest of the new business models that we are piloting has been performing very well and in line with our expectations, particularly for plant-based, we are right now moving from a pilot into a scale phase. We have already producing our -- most of the products in our plants, getting more clients, having a related portfolio that help us not only capture more clients, but also have a bigger presence in the shelf, and that is helping us to promote our brand, which is, for example, in Spain our hotdogs are plant-based hotdog is the #1 plant based hotdog in Spain and that has happened in just a few months since the launch.

Okay. One more, if I may. And I'm seeing a lot of questions on Europe, and you know the recovery. Europe for you guys has been really tough not to crack since the acquisition. Have you guys analyzed divesting this operation entirely and focusing on Mexico, United States and LatAm, which have been great businesses and shown great growth over the last decades.

Sure. So, Alejandro, I think what is currently happening in Europe is very important, but we see it as a temporary effect -- temporal factor not temporary effect -- it has been further then the -- I would say, the impact on the Russia-Ukraine conflict. And we see that this will be temporary. And once the inflation eases, we will be able to recover our pretty complex margin levels and then work to achieve our target. As of right now, we're not considering exiting Europe, and we will continue to operate as efficiently as possible. You know that we have a very clear strategy on Europe based on 3 levers. And our target is to reach double-digit in EBITDA. We still think that, although it will probably take us more time, we can reach that based on the strategy, we want to very much one optimize footprint. We're working on that. We have already done a couple of strategic moves, and we will continue doing more of these efforts. 2, we have been working on identifying the high potential opportunities that we have in each country and tackle them. And third one is related to our European heritage portfolio that we have the opportunity to sell in different countries with high margins. So particularly China, Japan, the U.S. and U.K. So we're working on those 3 levers. And with the pricing strategy that we have with the customer expense saving initiatives that we are doing, we think we can reach our target in the near future.

There are no more phone questions at this time.

Thank you, Sherry. There are no more webcast questions either for Sigma. So let's now move forward and take questions on Alpek and Axtel. We have Jose Carlos Pons, Alpek's CFO; and Adrian de los Santos, Axtel's CFO. So could you please prompt for questions on Alpek or Axtel?

[Operator Instructions] There are no questions on this line.

Okay. In the meantime, there is one question for Axtel coming in through the webcast. So this is related to Axtel's refinancing plan, Adrian. Could you elaborate a little bit more on that topic?

Yes. And good afternoon, everyone. During the quarter, Axtel obtained commitments to participate in the syndicated loan from additional banks, additional participants than what we had in previous report or previous conference call. We also made progress in conversations with development banks. That's part of the comprehensive liability management transaction that Axtel wants to put in place. And there is also a question about what's the estimated cost of potential new financing. We're looking at variable rate loans that will range from 2.5% to 3.5% more or less, depending on a net leverage ratio grid. That's the sort of cost that potential bank financing will be for Axtel today.

Thank you, Adrian. Any questions coming in from the line Sherry?

There are no questions at this time.

Well, in that case, we'd like to thank very much everyone for their interest in Alfa. And also, if you have any additional questions, please feel free to reach out to us. We will be pleased to assist you. Thank you very much for joining us today, and have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.