Sigma Foods SAB

Good afternoon and welcome to Alpha's first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions given at that time. However, if you are participating via the webcast, you may submit questions at any time during the call using the ask the question option on your screen. 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 call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Eduardo Escalante, ALPHA's CFO, Carlos Jimenez, ALPHA's General Counsel, Roberto Olivares, SIGMA's CFO, and representatives from each alpha company. Before moving on to a discussion on results, just a quick reminder that as a result of the upcoming spinoff, Axtell meets the definition of a discontinued operation in accordance with IFRS. And we began accounting for this subsidiary as a discontinued operation in the third quarter 2022. Unless otherwise specified, All consolidated figures referenced in this call exclude Excel. 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 ALPEC. Progress continues on the transformational front with the accelerated spin-off during its completion and financial flexibility at the alpha level enhanced via the full redemption of senior nodes. At the same time, We continued transferring value to shareholders, but we didn't pay them much. 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 ALPEC performance the 2021 and 22, have returned to normal levels. These factors include ocean freight waves and global reference margins, among others. As a result, Altec reported 12% lower revenue and a 59% decline in EBITDA. Adjusting for extraordinary items, Altec'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 billion in undercurrent costs associated with the shutdown of the PEP racing operation at the Cooper River site in South Carolina. Altec 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 and improving capacity utilization by transferring PEP production to other sites. I will now turn the call over to Roberto Olivares, CISMA 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 mention a couple of noteworthy developments regarding the execution 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 first Q22. 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 pesco. 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 amid operational adjustments in response to market conditions. Consolidated EBITDA rose to 192 million, a record first quarter figure of 19% year-on-year that was due to the favorable performance in America. In Europe, we made significant progress in mitigating the impact of inflationary pressures. Revenue management initiatives included a 29th average price increase in local currency. Moreover, energy prices had come down from their peak levels in 2022. However, current industry dynamics continue placing pressure on micro-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 advance in our effort 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 US will consist of seven 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 centralize known core 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, SGMA'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 clear commitment to sustainability, and increase transparency and disclosure we have sought to achieve. We are confident that our proactive approach won't fit in 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 alpha's third value potential by efficiently simplifying its corporate structure. Since we announced our plan in 2020, NIMAC was successfully spun off. Accel will soon be spun off. Altec and Sigma have gained autonomy from ALPHA-related services and corporate expenses have significantly decreased. Most importantly, ALPHA has a firm commitment and a unique position to continue this orderly transformational process with a flexible time horizon. Our focus? is on finalizing the Excel schema 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 Alta, Altec, and Sigma in any step forward. Hence, It is crucial for SGMA 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 ALPHA's value-added base and its business' 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 premium notes due 2024 by obtaining multiple long-term bank loans, which are prepayable at any time. As a result of this transaction, ALPHA gained crucial flexibility with respect to the timing and size of future debt repayments. Regarding the Excel schema, 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 in our last conference call in mid-February. We look forward to soon being able to list Controlador Accent, which is the entity that received Alpha's controlling stake in Excel and will be distributed to Alpha shareholders. We have been diligent in following a balanced approach towards capital allocation, combining dividends, capex, debt reduction, and share buybacks. In March, as appealed by shareholders, We pay the cash dividend of $0.02 per share, which is equivalent to approximately $96 million. Alpha 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 Alpha's balanced approach. We will continue implementing 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 $1.6 billion in 2023. However, ALPEC 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, ALPHA'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 ALPHA. Eduardo, Carlos, and I looked at questions on ALPHA or corporate matters. As a reminder, SIGMA, ALPHA, and Excel will be available to answer individual questions later in the Q&A session. Sherry, please instruct participants to queue for questions on alpha.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. and for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Rodolfo Ramos with Baradeso BBI. Please proceed.

Thank you, everyone. Good afternoon. Just one on alpha, and maybe there's a little bit of overlap with the sigma, but let me kick off with, With one on unlocking value, on your unlocking value initiative, I just want to see, you know, this performance on Sigma during the quarter was certainly a good surprise. On the other hand, you have Alpex performance, at least on the, you know, operation, but also the share price has had a significant correction. Just wanted to see how do these two factors, you know, the fact that you have a stronger Sigma, which was something that you wanted to see before moving ahead and 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 timeline as in regards to your Unlocking Value Initiative? That would be my first one.

Thank you, Raul, for the question. The performance of both companies is important for the future steps of the Unlocking Value process. Certainly, the improvement in FIGMA's results are very, very helpful. And regarding Altec, even though we have a decline in results as we mentioned and was extensively discussed in Altec's conference call, the position of Altec continues to be very strong. Net leverage of Altec is 1.8 times. So we still have confidence that going forward both ALPEC and the improved SGMA will help us to support the next steps regarding the Unlocking Value process.

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

Yeah, regarding taxes, the stock price is an important factor here. depending on what the future steps are, but certainly in any kind of a spin-off, the stock price is important regarding the tax impact. So the reduction of the IPEC stock price is, has implications on both ways. We want Altec to thrive and improve its stock price, which will help our valuation. But on the other hand, certainly it has an impact on the tax implications.

Thank you. And just one last one here, and this may be 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 SGMA. But just wanted to see whether you see your business or, you know, 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 passed amended or enacted because some of them are going to be new resolutions and new laws. It's important they are having or they will have a potential impact on the Mexican economy. Regarding ALPHA, the one that we believe is the most significant is It's 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 six days of work, you have a right to rest for the seventh one. And the proposal is to have five workable days with two of rest. As you know, the change means a change of the Constitution, so the process is going to be complex. You need two-thirds of the two chambers, and then you need a majority of the state congresses. So we expect that that discussion will start back in September when the ordinary term 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, budget 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 elections. So political arguments and the weight that will be given to these legislations is going to be significant. Other than that, we don't expect to have any material impact on our businesses or operations.

Great. Thank you, Carlos. Very insightful.

Our next question is from Nick Lipman with Morgan Stanley. Please proceed.

Thank you very much. Thanks for taking the question. Essentially, my question is almost identical. So I'll just try to change it a little bit. I was going to ask to what degree it was becoming easier to do the Alpex spinoff as the stock price comes down. Can you provide any either 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 of equity as a proxy in order to try to make estimations or estimates on when you would be able to do that. Thank you very much for taking the question.

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 assets, and therefore it implies the tax payment corresponding to a transaction of that type. We do not have a specific level of stock price to determine the spin-off of Altec fully or partially. 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 alpha, both the consolidated level as well as each one of the subsidiaries, maintains a strong financial position before we do anything. Lower results in Altec may mean lower stock price, but on the other hand, lower results provide less flexibility model for Altec to support alpha, alpha 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. Thank you. Sure, you're welcome.

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 Altec distributing an extraordinary dividend allowance. Let me begin by reaffirming that ALSA 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 Altex paying themselves an extraordinary dividend, I would say that not exclusively. Certainly, the payout of Alpha depends on the results going forward, which are affected by ITEC's results and their own capability of being able to pay dividends. It is an important factor, but I will say that's the only element that we will take into consideration, that the Board will take into consideration in order to define future dividend payment of alpha. SIGMA's improvement in results is very helpful regarding cash flow and the financial position of alpha at the consolidated level also. And those are, again, also important factors. Thank you, Eduardo. There is another question on alpha related to share buybacks, about our view on share buybacks at this time. Well, that's something that we analyze in a continuous form. As you recall, we did significant buybacks in the past, and going forward, it will be an opportunistic topic, 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 bidder 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 SGMA. Roberto Olivares, SGMA CFO, will answer your questions. Sherry, could you please pass the questions on SIGMA?

Yes, thank you. As a reminder, it is star 1 on your telephone keypad if you would like to ask a question on SIGMA. We do have a question coming in from Rodolfo Ramos. We will join you through. Please proceed. Rodolfo, please proceed.

Sorry, I was on mute on my end. I just wanted to get here some clarification. Can you talk a little bit about how you're seeing – I was very surprised at the strong volume that you had in Mexico. Just wanted to see what do you think is driving this and how sustainable you think consumption has been. I mean, we're going into an electoral year and whatnot. But just wanted to see fundamentally how do you see consumption in Mexico going forward, if you can provide granularity as to what kinds, you know, where do you see growth. And, yeah, that would be helpful. Thank you.

Thank you, Rodolfo, for your question. So we see volume in Mexico, volume increase around 6%. And about half of that actually comes from food service. We have seen a very strong food service demand as tourism continues to increase in the country, also occupancy and also in the cities. Also, we saw a dairy segment growing, particularly in the retail that has been growing rapidly. very good in the quarter. And I will say the traditional channel, although it's 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 600 million Euro bond that is due in 2024.

Okay, thank you, Fernando. So during the third quarter of 2022, we mitigated the refinance risk by securing four committed baseline that will be used to refinance the 600 million euros 2024 bond. And the resources are expected to be dispersed and utilized to redeem the bond within a three-month period prior to the scheduled maturity. So that will be between November and February, between November of this year and February of the next one.

Thank you.

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

Sure. Thanks, Karim.

So we're gradually improving results through pricing actions, 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, mid-cost in the first quarter continues to increase. And as we are increasing prices in Europe, it takes some time to be reflected. So whenever the inflationary pressure eases 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.

So we are confident about reaching the guidance. I would say 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 effects 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 vessel. If there's any way in which the strong vessel has changed the SIGMA strategy in Mexico?

I think in general, the peso affects the Mexican operation two ways. The first one is most of our raw material comes from the U.S., thus it's payable in U.S. dollar. So a stronger peso helps us to have lower raw material costs. 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 stronger results in U.S. dollars.

Thank you. 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 US, there is some pricing opportunity particular to offset some pressures on labor, packaging and other raw material costs. I would say for the rest of the regions, it will depend particularly on how the raw material behaves going forward as we are seeing today. Particularly, some raw material in the Americas, Turkey to be specific, has started to decrease this year, thus also benefiting the margin. I just wanted to mention that we take a careful approach to balance price and volume because we want to – whatever we do in terms of pricing actually helps in the long term the results of the company.

Okay. Thank you very much, Roberto.

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

Absolutely, Sherry.

Go ahead. Okay. Our next question is from Alejandro Azar with GBM. Please proceed.

Hi, guys. Good morning. Roberto Hernan. Most of them have already been answered, but, you know, you were talking about guidance, and my question is that if 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. In your guidance, you have an embedded 20 pesos and we are at 18. That's my first question. And the other one is on your plan 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? Thank you.

Thank you. Thank you, Alejandro. So first question related to guidance. I will say besides the effect that you already mentioned, the 20 pesos versus the 18 pesos, 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 worse 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 two years, and thus they are reducing the supply impacting prices. So we have those two 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 growth business units and plant-based and snacking. Right now, sales of both plant-based and snacking represent 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 piloting to a scale phase. we have already producing most of the products in our plants, getting more clients, having a broader portfolio that helps 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 hot dog, our plant-based hot dog is the number one plant-based hot dog in Spain. And that has happened in just a few months since the launch.

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

Sure. So, thank you, Alejandro. I think what is currently happening in Europe is very unfortunate, but we see it as a temporary factor, not a temporary factor. It has been first the ASF, then I would say the impact on the Russia-Ukraine conflict, and we see that this will be temporary, and once the inflation subsides, we will be able to recover our pre-conflict 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 three levers. Our target is to reach we still think that although it will probably take us more time, we can reach that based on the strategy. We want to very fast, one optimizer footprint. We're working on that. We have already done a couple of strategic moves and we will continue doing more of these efforts. Two, 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 three levers and with the pricing strategy that we have with the cost and expense saving initiatives that we're doing, we think we can reach our target in the near future.

Great. Thanks for the call, Roberto. Thank you, Alejandro.

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 Altec and Axtell. We have Jose Carlos Pons, Altec's CFO, and Adriano De Los Santos, Axtell's CFO. So could you please prompt for questions on Altec or Axtell? Of course.

As a reminder, the star one on your telephone keypad if you have a question. In the meantime, there is... There are no questions on the phone line.

Okay. In the meantime, there is one question for Axel coming into the webcast. This is related to Axtell's refinancing plan. Adrian, could you elaborate a little bit more on that topic? Yes, and good afternoon, everyone. During the quarter, Axtell obtained commitments to participate in the syndicated loan from additional banks, additional participants, than what we had in previous reports or previous conference calls. We also made progress in conversations with development banks. That's part of the comprehensive liability management transaction that Axtell wants to put in place. And there's also a question about what's the estimated cost of potential new financing projects We're looking at variable rate loans that will range from two and a half to three and a half, more or less, depending on a net leverage ratio grid. That's the sort of cost that potential bank financing will be for Accent today.

Thank you, Ogan.

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 Alpha. And also, if you have any additional questions, please feel free to reach out to us. We would 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.