Sigma Foods SAB

Good day and welcome to Alpha's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. There will be a question and answer session at the end of the presentation with instructions given at that time. You may also submit questions at any time during the call using the Q&A button on the webcast, which will be answered during the Q&A session. As a reminder, today's conference is being recorded. Now, I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin.

Good day, everyone, and welcome to Alpha's second quarter 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, and Roberto Olivares, SIGMA's CFO. I will now turn the call over to Eduardo.

Thank you, Hernán, and good day, everyone. We greatly appreciate your participation. We are pleased to report better than expected results once again. Our two business units are benefiting from solid execution to boost operation efficiencies, maximize cash flow, and capitalize on specific dynamics in the respective markets. On a consolidated level, this led to double-digit EBITDA growth in the second quarter and first half of the year. driven mainly by outstanding performance at Sigma. For Alpek, it was encouraging to see a slight sequential improvement in Asian reference polyester margins as headwinds persist in the global petrochemical industry. Alpek's accumulated comparable EBITDA of $312 million is on track to reach its full year guidance, supported by resilient demand and cost reduction initiatives. Volume increased 2% in the first half of the year, driven by the polyester segment. During the second quarter, ALPEC also completed its comprehensive plan to capture $75 million in annualized savings. Decisive actions over the past several quarters include footprint optimization, organizational restructuring, and improved power supply agreements. Efforts focused on enhancing cost competitiveness will continue. It is important to note that ALPEX leverage ratio improved to 3.3 times at the close of the second quarter, driven by higher EBITDA and 5% lower net debt quarter-on-quarter. Reduced CAPEX, dividends and optimizations in net working capital contributed towards a strong cash flow generation this quarter. Alpex operational and financial initiatives to mitigate industry headwinds are paying off and keeping the company well positioned to become a standalone entity. I will now turn the call over to Roberto Olivares, Sigma CFO, to cover the following section. Please, Roberto.

Thank you, Eduardo, and good afternoon, everyone. I am pleased to share an overview of SIGMA's exceptional performance this quarter, highlight key regional results, discuss our upward revision for the 2024 guidance, and explore exciting updates on various strategic initiatives. SIGMA Q24 marked our 13th consecutive quarter of year-on-year revenue growth. with Sigma achieving an all-time high quarterly EBITDA. Results reflect solid execution to capitalize on favorable market conditions, including a strong consumer demand and the appreciation of the Mexican peso against the US dollar throughout most of the quarter. Moving on to regional highlights. Results in Mexico were supported by a consistent growth across all categories and channels alongside a strong peso. In the U.S., our operations were boosted by our Hispanic and mainstream brands. Similarly, in Latin America, a strong consumer demand in Costa Rica, the Dominican Republic, and Ecuador significantly contributed to our performance. In sum, Mexico, the U.S., and Latin America achieved record volume and sales in Q24. Additionally, Europe extended its recovery trend with a significant year-on-year increase in quarterly EBITDA, even after adjusting for the one-time expenses from the region's restructuring initiative in 2Q23. This improvement was mainly driven by a better performance in the fresh meat business, as well as the benefits from the Italy divestment. Encouraged by our solid performance in the first half of the year, we're excited to announce a novel revision of our 2024 guidance. We now anticipate full-year revenues of $8.85 billion and EBITDA of $1 billion, 2% and 9% higher, respectively, versus our original projections. Reaching $1 billion EBITDA represent a historic milestone for SIGMA, supported by outstanding performance in the Americas and the ongoing recovery of our European operations. It is also important to note that the new guidance assumes an average exchange rate of 18.5 pesos per US dollar for the second half of 2024. Shifting to developments in Europe. We are pleased to welcome Juan Ignacio Amat as the new CEO of our European operations. Juan brings over two decades of experience in various leadership roles at large European consumer goods companies and a proven track record of successfully implementing transformational plans. We look forward to leveraging Juan Ignacio's leadership and experience to build upon the team's comprehensive efforts to achieve higher profitability in SIGMA's second largest region. Moving on to strategic initiatives. We continue advancing in our growth business unit, actively expanding our offerings in the plant-based category. This includes the launch of Better Nira, a new plant-based whole-cut product in Spain, and the introduction of our Better Balance plant-based brand in France and Portugal. We are excited by the prospects of enhancing our branded product portfolio with high potential categories. On the financial front, our net leverage ratio improved to two times this quarter, the lowest level in nearly 11 years. During the quarter, we completed the full redemption of our $1 billion senior notes due in 2026, primarily with funds from successful issuance of local notes or certificate bursaries. Liability management actions here to date have reinforced SIGMA's financial position by extending average debt maturity to 5.7 years at the close of this quarter, up from 2.2 years at the start of 2024. Looking ahead to the second half of the year, we're well prepared to continue leveraging the evolving market conditions. Our foundation is strong, our strategy is sound, and we're poised to continue delivering enduring value to our stakeholders. I will now turn the call back to Eduardo operational comments and closing remarks.

Thank you. Thank you, Roberto. Next, I will provide a brief update on consolidated guidance and ALPHA's transformational process. ALPHA's guidance was raised to reflect the latest upside from SIGMA. Our consolidated EBITDA guidance increased 5% to $1.59 billion and revenues were adjusted up 1% to $16.78 billion. Let me highlight that SIGMA accounts for 62% of the new consolidated guidance. Record dividend generation at SIGMA magnifies the value opportunity behind the separation of Albit and provides crucial financial flexibility in the advanced stage of Alpha's transformational process. More than ever before, there is a large disconnect between Sigma's intrinsic value and its implied value being bundled together with Alpec as Alpha. This massive value opportunity is the biggest incentive for us to accelerate debt reduction and separate Alpec as soon as possible. Lowering debt plays a key role in the orderly process we envision, ensuring that Sigma maintains a strong financial position post-separation. Excluding Alpec, Consolidated net debt at the close of 2Q24 was $3.25 billion. This figure needs to come down closer to our indicative target of $2.5 billion. Among other debt reduction alternatives, various formal sale processes advanced further during the quarter. We will have more to say about this important matter upon reaching binding agreements. In the meantime, we greatly appreciate your understanding and reaffirm our full commitment to finding the best path forward. Finally, I would like to thank all the Alpha employees who continue to work tirelessly on driving solid operational results year to date. and moving forward to complete our transformation process. 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 and I will take questions on ALPHA or corporate matters. As a reminder, Sigma and Altec will be available to answer individual questions later in the Q&A session. Operator, please instruct participants to queue on questions for Alpha.

Dear participant, if you'd like to ask a question about Alpha, please use the raise your hand button of your Zoom tool.

Our first question comes from Juan Ponce of Bradesco. Please, sir, go ahead.

Hi, Eduardo, Hernan. Thanks for taking my question and congrats on the results. We have seen, you know, this value unlocking initiative process move forward. We started off with the NEMAC spinoff and now you're seeing, you know, Sigma's stronger performance, guidance is being raised. Um, but the alpha, some of the parts discount has continued to widen. I, I understand there's, you know, there's certain metrics, certain, certain thresholds that we need to hit for, for, for, for the next step for, for the output spin off to, to materialize. Um, Can you talk a little bit more about the different options you have in terms of the non-core assets that you can sell or divestments of potential business units at Sigma? We've heard in the past, so just an update on that would be great. Thank you very much.

Thank you, Juan. Thank you for your question. First of all, let me mention that

We continue to be fully committed to completing this process as soon as possible. However, we feel it is important to take the next steps when we make sure that each one of the entities are available on our website.

outside of Alpha and Sigma as the remaining business within Alpha, maintain a very solid financial position.

We don't want to put a heavy burden in any one of the operations. So that's why we need to introduce the Kubernetes that we have at the company.

We estimate that Together, the debt and the holding plus the debt that we greatly appreciate your participation. We are pleased to report that $2.5 billion should be able to bring it down to $2.5 billion in order to benefit from solid execution, to boost operation, the efficiencies, maximize cash flow, and capitalize on specific dynamics in the respective market. On a consolidated level, This led to the digital growth in the second quarter and first half of the year, driven mainly by an outstanding performance today in alpha. It was encouraging to see its life-sequential improvement in Asian reference for yesterday's markets, as held in the order of 50% in the global version of the list. Just adding um let me share with you increase two percent in the first half of the year if you remember the current value of sigma within the second quarter I also completed this comprehensive plan to capture 75 million dollars in annualized sales, decisive actions on the past several hours. If you compare that with the organizational restructuring, I improved power supply agreements. Efforts of other consumer companies, we think there is significant value that is not being reflected in the alpha stock price. So, generally, we hope there is significant value times at the close of the second quarter. very much I mean I'm finding a lower net a question a reduce now we are we are looking at evening several from the session today on the gap we have this call three minute towards the strong as flying around here in the headquarters in In Montreal, we have a lot of financial initiatives to mitigate the use of non-core assets and some other options that we're in. At this time, I do not have specific I'm not going to go over to Roberto to advance and follow those fronts, but what I can tell you is that on time for ISO to do this, I at least discharge an overview of SIGMA's exceptional performance this quarter.

In the short term, we'll provide additional disclosure in due course.

There are no further questions at this time.

Thank you very much. Thank you. There are no further questions at this time. and the appreciation of the Mexican peso against the U.S. dollar over most of the quarter. Moving on to regional highlights. Results in Mexico were supported by the consistent growth across both categories and channels alongside a strong peso. In the U.S., our operations were boosted by our Hispanic and mainstream brands. Similarly, in Latin America, Dear participant, if you'd like to ask a question about Sigma, please use the raise your hand button in your Zoom tool. In sum, Mexico, the US, and Latin America achieved best portfolio and sales in the second quarter of 2021. Additionally, Europe extended its recovery... How about it? Thanks for taking my question.

I wanted to talk a bit about the U.S., specifically as it pertains to profitability. I think we have seen a different market as it pertains to proteins and their subproducts this year.

I just wanted to get your latest thoughts on profitability ahead.

We have seen some volatility on pork prices, on the cut-out values. Chiken, we also have seen some strong volatility.

So I just wanted to hear a possible profitability going ahead, especially due to the different comps from last year as well. Thanks. We now anticipate full-year revenues of $8.85 billion, an EBITDA of $1 billion, 2% and 9% in the US, both in volumes and revenues, versus our original projections. in the U.S., which in terms of profitability represents a historic milestone for SIGMA. The second part was to see standing performance in the Americas and the ongoing coverage of European and Arctic. It is also important to note that the new guidance assumes an average exchange rate of 15.5 pesos per US dollar for the second part. we've started some revenue management initiatives in Europe. We're pleased to welcome Juan Ignacio Almaso as the new CEO of Seasonal Biennial Provisions. Juan, over two decades of experience on various leadership roles as the director of the Biennial Consumer Goods Company, gave the margin and approval of successfully implementing transformation plans. Thanks, Alberto. Thank you, Lucas. Moving on to strategic initiatives. We continue advancing in our growth business unit, actively expanding our offerings in the plant-based category.

Our next question comes from Alex Assaf of GBA.

Please, sir, go ahead. a new plant-based whole-gut product in Spain and the introduction of a better balanced plant-based brand in France and Portugal.

We are excited by the prospects of enhancing our branded product portfolio with high potential competitors. On the financial front, our net leverage ratio improved to two times this quarter, the lowest level in nearly 11 years. comes from the food surveys and then if on that, if on your margins, if you are having a mixed effect and the other one on Mexico is if you are having your volume seems also very really strong, so if you are having to 5.7 years at the close of this quarter, from 2.0 years at the start of 2024. Looking ahead to the second half of the year, if we're well prepared to continue leveraging the evolving market conditions, our foundation is strong.

Our strategy is sound, and we are always looking forward to delivering enduring value to our stakeholders. Thank you. Let me first cover the one related to margins and the mixed effect with services.

Next, I will provide a brief update on consolidated guidance and alpha transformational process. Alpha's guidance was raised to reflect the latest oversight from SIGMA. Our consolidated EBITDA guidance increased 5% to 1.59 billion, and revenues were adjusted up 1% to 16.78 billion. Let me highlight that SIGMA accounts for 62% of the new consolidated guidance. Record digital generation at SIGMA magnifies the value of opportunity behind the separation of ALPIC and provides crucial financial flexibility in the advanced stage of ALPHA's information analysis. Moreover, there is a large disconnect between SIMAS intrinsic value and its implied value being bonded together with ALPIC as ALPHA. This massive value opportunity is the biggest incentive for us to accelerate debt reduction and separate Altair as soon as possible. Lowering debt, placing QO in the order of the process we envisioned.

ensuring that Sigma maintains its strong financial co-packers for some of these categories while we start increasing our capacity. So right now we're trying to capture as much volume as there is demand in the market for our product. But yes, we're working on some projects to release or add some extra capacity, I would say in the short to medium term. And in terms of upside on margins, I would say yes, with extra volume, there's still some chunk capacity. The only thing, and just to be very cautious about, right now we're seeing a little bit more extra pressure on on on certain raw materials and also the the effects volatility that right now is in the market given the the current macro political environment we do see a second half with a a stronger us dollar that could potentially impact a little bit in in margins as as in the second half of the year now

Okay. Thank you, Roberto. And my other two questions are really simple. If you could remind us with all the restructuring or the reorganization that you're doing in Europe, what are the margins that you are targeting there? If we should see the full potential this year or if that's coming in the next couple of years? And the other one is on free cash flow. With your new guidance with, you know, around 300 in CapEx, 150 in interest, it seems that you'll be generating close to 300, 400 million in free cash flow. What are your capital allocation priorities on that?

So the first one on Europe, let me say, we remain fully committed to continue our consistent improvement in the region. We, as you mentioned, we reached a low point last year in 2023. We are in the process of recovering what we had prior to the conflict in Europe. And we expect to reach that level sometime in the following 18 months. We expect to end up this year with a margin a little bit above between 4% and 5%. And then during the next years, continue the trend to recover what we have in the past. In terms of free cash flow and capital allocation, yes, I would say right now our focus is on the leveraging to try to help a little bit the corporate strategy at the alpha level. There could be additional capes or increments in the coming year, particularly due to certain projects that we that we have in some of the regions but we we usually try obviously in terms of capital allocation to prioritize safety quality of our products then some some a capex related to that that have some efficiency or efficiency or extra volume that help us capture more value and and then any other

okay thank you roberto thank you there are no further questions at this time thank you we do have one question through our q a chat which relates to capacity utilization You could share, Roberto, current plans to increase capacity in any of the regions and where you see utilization rates increasing within the next few years. Thank you.

So let me talk region by region. Let me start with the US. In the U.S., we continue advancing in increasing our capacity. In the case of processed meat, last year we acquired a plant in Iowa that helped us increase our capacity. There's still some additional phases that we have been adding into that original capacity that we had co-hire actually during the second quarter of this year. We had an extra line to that plant. or giving us more capacity of sliced lunch meat for that plant. And there's still extra room in that plant to add more lines in cases it's necessary and that will increase capacity with not that much investment. And then in case of cheese, we also add an extra bat in our Los Altos plant in California to add a little bit more of capacity. We still need more capacity in that plant given the volume that we have. Recently, we're working on a plant in general, a master plant in the US in cheese to increase capacity between our California and our Northeast plant in the US. In case of Mexico, we were working on a project to increase capacity in yogurt. There's some opportunity or there's strong demand for our yogurt products in the market. So we, in the next short to medium term, will need to increase our capacity in yogurt. And also in certain of our processing categories, depending on on the type of product, there's opportunities to also increase capacity. In the case of, in general, we're also working on the other side of Europe in projects to increase our capacity utilization in some of the plants, either through extra volume or also to try to resize or optimize some of the footprint in order to have some efficiencies in our operations.

Thank you, Roberto. That was the only question on the Q&A option. So in that case, let's now move forward and take questions on Alpec. We have Jose Carlos Pons, Alpec's CFO. So operator, please prompt for questions on Alpec.

Dear participant, if you'd like to ask a question about Alpec, please use the raise your hand button of your Zoom tool. There are no further questions at this time.

Thank you. We do have one question via the Q&A option, and this is, considering the extremely weak consumption in China, do you see any risks to polyester margins? There is an oversupply problem similar to the one we're facing across other industries. Thank you, Alfonso.

Thank you for your question. I'll start by saying that, first of all, margins have already incorporated the situation in China, so we're seeing polyester margins at a lower level than historical performance. They've been recovered a little bit since the summer of last year and gradually are getting into the direction that it was incorporated into our guidance. That's the second topic. Our guidance already considers low levels of margins, and therefore, it doesn't seem to be an issue for meeting our guidance expectations. Now, also, we've seen many of the countries in which we participate already moving towards fairer trade. What do I mean by fair trade? That means they're imposing duties or anti-dumping measures to protect against non-market fair practices. For example, the U.S. has an anti-dumping that takes the duty above 100%. Mexico implemented a duty that it takes imports from China around 35%. And there's also a measure or a study that the government is doing to put in place an anti-dumping in Mexico. And the other markets in which we participate have already implemented similar measures to protect. The other thing that you need to consider or needs to be considered are the current situation in logistics. As you've seen, there's an interruption or a change in the logistics times and costs because of the Red Sea condition. and that also protects against chinese uh unfair imports and uh and and then what you're starting to see in the chinese market is a portion of rationalization on capacity and less build up of new capacity so we believe that that's uh also a condition that might gradually take uh to a more sustainable condition in the market so In short, we don't see big risk on margins to the level that they are today because there are certain conditions that will protect us to what we're seeing, and that could even take them to a better level.

Thank you. José Carlos, we do have another question, and this is, could you walk us through Alpec's leverage expectations?

Yeah, we closed the second quarter around 3.3 times net debt to EBITDA. It's completely in line to our expectations and we are targeting to end the year close to 2.5 times. We are doing extraordinary measures to protect our balance sheet. We improved working capital in the quarter. We rationalized capex and we expect to end the year below our initial guidance of $200 million. We also proposed not to pay a dividend this year. That was approved. So that's certainly a measure that will help us protect the balance sheet and end the year close or hopefully at 2.5 times net debt to EBITDA.

Okay. Thank you. So it appears that we don't have any additional questions. And in that case, I would like to thank you very much for your interest in ALPHA. If you have additional questions, please feel free to reach out to us. We would be pleased to assist you. Have a great day and we will now disconnect.

This concludes today's conference call. You may disconnect.