Sigma Foods SAB

Good day, everyone, and welcome to ALPHA's Third Quarter 2024 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 Alvaro Fernandez, Alpha's Chairman and CEO, Eduardo Escalante, Alpha's CFO, and Roberto Olivares, Sigma's CFO. I will now turn the call over to Alvaro.

Thank you, Hernan. Good day, everyone, and thank you for joining us. I'm happy to be speaking with you today as we present the single business structure we have been envisioning since 2020, in which Alpha is Sigma. Over the past few years, Alpha has effectively transformed its 50-year-old conglomerate structure into four separate business units with leading positions in their respective industries. This organization is providing our shareholders with full flexibility to balance their ownership stakes in EMAC, ASTEL, ALPEC, and SIGMA. By having complete independence from one another, each of these four businesses has the opportunity to achieve a fair valuation based on its individual merits and potential. This is particularly important for SIGMA. to which the investment community will soon have direct access in the Mexican stock exchange. It is encouraging to see that Alpha's share price rising as we move closer to the final structure. This increase reflects a portion of the attractive value opportunity concentrated around our branded food business. A number of essential conditions had to be fulfilled for us to finally spin off Alpec, especially over the past year. Fortunately, we received overwhelming support from all parties involved. We're raising $400 million in capital to reduce debt, as we have obtained consents from more than 91% of ALSA's bondholders, both of which provided the necessary clarity to move forward. The capital increase was oversubscribed by more than 2.6 times, offering shell hoarders a great opportunity to benefit from the upside of the transformation process through a subscription price of 10.75 pesos. Building on these key milestones, just last week, our shell hoarders approved our proposal to implement the last SPMAF. We are pleased to have reached this stage for Alfa's transformation with a remarkable turnaround in our petrochemical business, which reported its highest quarterly comparable EBITDA since 2022. These results prompted Alpec to raise its full year guidance by 13% to $675 million, driven by improved reference margins and stable demand. ALPEC has the capabilities to extend its full track record as an independent entity. Led by its experienced management team, the company has delivered growth and strong cash generation in every stage of the petrochemical cycle, supported by a highly competitive asset base. The timing is also right for Sigma to benefit from the simplification of Falsa's corporate structure. Sigma has been proactively enhancing its leadership position as it expands its core, integrates accredited acquisitions, improves profitability of its European operations, and steps up its efforts to develop new sources of revenue with disruptive capital growth. Sigma's diverse portfolio of leading brands across all its product categories, multi-channel distribution in 17 countries, and consumer-centered innovation offer a unique opportunity in the resilient food sector. We anticipate that these factors will align our valuation multiple with our global food peers, highlighted by the simplified Alpha Sigma structure. I will now turn the call over to Roberto to discuss SIGMA's third quarter results.

Thank you, Eduardo, and good afternoon everyone. Today, I'm delighted to discuss our standing results, highlight key regional achievements, share our progress in our growth initiatives, and unveil a pivotal new phase for SIGMA. To begin with, our performance this quarter has been extraordinary, achieving an all-time high in consolidated EBITDA for the third consecutive quarter. It's also our 14th consecutive quarter of year-on-year growth, reflecting solid consumer preference, leading to record-breaking polling. This consistent growth across all regions exemplifies our robust operational success, We're closely monitoring market conditions. For our better than expected progress, support an estimated $50 million further upside on our 2024 EBITDA guidance. Looking at the regional highlights. Mexico continues to demonstrate a strong trajectory with three consecutive quarters of record volume and EBITDA. Growth continues across all channels and categories. reinforcing our market leadership and deepening our connection with consumers. In the U.S. and Latin America, all-time high sales and volume have led to significant margin expansions. This performance was driven by our mainstream and Hispanic brands in the U.S. and by robust results in Costa Rica and the Dominican Republic in Latin America. Europe, meanwhile, is steadily progressing towards recovery, supported by operational efficiencies that have delivered the highest-earned quarter EBITDA since 2021. On the strategic front, we're actively making progress in developing new sources of revenue aligned with our long-term goals. We have recorded substantial given-year quarterly revenue growth in various of growth initiatives, These initiatives include Better Balance, our plant-based protein brand, Snacking For You, and our B2C e-commerce platforms. We're also advancing in the pilot phase of Netcort, our distribution business that connects Mexican and Latin American companies with U.S. consumers. As part of this effort, we launched a new brand, Mucho Gusto. Featuring heritage and novelty products designed to meet the rapidly growing Hispanic cooking needs. While these are currently a small portion of our revenues, each initiative has promising potential to be scaled up over time and complement our core business, supporting sustainable long-term growth. As we move forward, we're embarking on an exciting new chapter at Sigma. After supporting Alpha's transformation process through EBITDA expansion and contributing to the constant solicitation process by bringing bondholders closer to Sigma via guarantees, we have reached a pivotal moment. Equity investors will have the opportunity to invest directly in our business. This marks a significant milestone in our journey and opens new avenues for value creation. To wrap up, we're encouraged by the progress made by the SGMA team and look forward to what lies ahead. We're committed to maintaining this momentum and are optimistic about the future. Thank you all for ongoing support and trust in SGMA. I will now turn the call over to Eduardo for additional comments and closing remarks.

Thank you, Roberto. Let me begin by discussing guidance. With respect to ALPHA, following the spin-off approval and considering that ALPEC is now reported as a discontinued operation, we will no longer be issuing a consolidated guidance. Reflecting strong third quarter results, ALPEC's 2024 EBITDA guidance has been revised upward, and SIGMA is optimistic about its full year estimates. Going forward, SGMA accounts for ALPHA's consolidated results. Next, let me discuss two accounting items. The first one is related to discontinued operation and its effect on ALPHA's EVW. While ALPIC is reported as a discontinued operation, ALPHA's EVW reflect a temporary reclassification impact. This is mainly associated with services that ALPHA provides to ALPEC on an arm's length basis. The net impact of discontinued operations with ALPEC will be disclosed as an extraordinary item for compatibility purposes when the spin-off concludes, at which time this effect is eliminated. As reference, The accumulated net impact of $11 million explains the difference between ALPHA's EBITDA and comparable EBITDA in 2024. The second accounting item involves a change in methodology related to the ownership stakes of the holding entity in its subsidiaries, including ALPEC and SIC. Pursuant to IFRS 27 and 9, as of August, we adopted deferred market value method for the holdings individual financial results, replacing the equity method used previously. We opted to implement this change given that deferred market value method reflects a proportion of value among the subsidiaries that is aligned with current market conditions. The accumulated effect associated with this change in methodology turned third-quarter consolidated majority net income into a $2 million loss. Next, I would like to make some further comments about the transformation process. We are paying down parental-level debt, totaling $575 million, which proceeds from the cap dividends obtained from both ALPEC and SIGMA. Share allocation notices related to the capital increase have been distributed to custodians and we expect to have the proceeds by November 4th. Investment credit ratings were affirmed by Fitch, Moody's, and Standard & Poor's for ALFA, SIGMA, and ALPEC. Most recently, Standard & Poor's raised its outlook to credit watch positive for Alpha and Z. A brief overview of the Alpec spin-off. The structure and process that Alpha undertook for the spin-offs of NIMAC 2020 and Axtell in 2022 will be the same for Alpec. shareholders approved the spin-off to be executed by forming a new entity called Controladora Alpec as the spawn-off company. These new company shares will be listed on the Bolsa Mexicana de Valores. Next, Alfa will transfer its entire share ownership of 82% in Alpec to Controladora Alpec. And finally, alpha shareholders will receive one share of Controladora Alpec for each of their alpha shares, while also maintaining the alpha shares. Let me discuss timing. This process formally kicked off with the spin of approval at Alpha's Extraordinary Shareholders Meeting on October 24th. Among other requirements, Controladora Alpec will need to complete a registration and listing approval process with the Mexican Banking and Securities Commission, the CNBB. Upon completion of this registration process, Alfa will issue a share distribution notice to its shareholders and distribute the new shares. Alfa will work with all relevant parties the spin-off process as quickly as possible. We expect the process to be completed in 2025. This concludes my remarks. We are now available to take your questions. Please, Hernan.

We would like to begin the Q&A session with questions on ALPHA. Alvaro, 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 for questions on alphas.

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 Ricardo Alves of Morgan Stanley. Please, sir, go ahead.

Hello, everyone. Thank you so much for the call. Impressive numbers. I have two questions, one for Sigma, which I'm going to ask later. The other one, you know, it's for Alpha. It's also related to Sigma, but the forum here seems to be the correct one to ask this question because it's related to capital allocation. There were news articles published a few days ago listing Alpha through the Sigma subsidiary among companies potentially interested in buying assets in the US. I know there's probably not a lot that you can discuss around the press reports, but given the the very important timing on the investment narrative around Alpha today, the corporate simplification process, the capital increase, the spinoff that you just very well educated us again on the call right now. Given all of that, the news was kind of surprising to some investors. So I just wanted to take the opportunity to ask you to give us an update on your current views on capital allocation and priorities for the company. Perhaps a good opportunity for you to be addressing potential divestment from non-core assets that you may have in mind. So just taking the opportunity of the news that was published to get your most recent update on capital location and priorities for the company. Thank you very much.

Sure, Ricardo. Thanks for the question. This is Eduardo. Regarding the published notes, the recent one, as you already mentioned, we have no comments on this matter. However, let me make a couple of points. First of all, We, we not far focus on completing the spin off and the capital increase. We are, we are in the middle of those processes. So we are, we are. Looking forward to finishes finishing them as soon as possible. In addition to that, I think it's also important to point out that as we have shown during all this process, we are firmly committed to the investment grade, not only on Alpha, but in each and every one of the companies, meaning Alpec and Sigma. So we will continue to be extremely careful on each step that we take regarding any potential future acquisition with this issue. And specifically in the case of Alpha, the next steps in Alpha, in addition to finalizing the processes that I just mentioned, really are housekeeping items. Housekeeping items in terms of finalizing the cleanup at the Alpha holdings in order to continue focusing exclusively within Alpha to the operation of Sigma. And having said that, let me turn the call over to Roberto if he wants to make any additional comments regarding the published note. Thank you.

Thank you. Thank you, Ricardo. I think in line to what Eduardo mentioned, no comments or reactions on the news, but happy to discuss any questions regarding the performance of SIGMA during the quarter and particularly our involvement in ADAPTAS transformation process. Thank you, Ricardo.

Absolutely. Thank you so much, Eduardo and Roberto. I'll get back to you in more details on Sigma later on the call. Thank you so much.

Thank you. Our next question comes from Andres Cardona of Citi. Please, sir, go ahead.

Hi, good morning, Alvaro Eduardo Hernan. Let me ask you about the potential tax payment you will have to do when the Alpec spinoff is completed. As far as I understand, the reference price was settled as of October the 24th. So maybe you could already guide us about the size of this potential payment. Or clarify if I am misunderstanding the situation. Thanks.

Sure, Andres. This is Eduardo. And thanks for the question. You're right. The actual price at what fiscally the spin-off is valued is the last transaction of October 24th. So, that's what will be used. What we can disclose at this time is that we expect no fiscal impact regarding the spin-off of IPEC since we will be able to cover the impact using losses that we have accumulated at the holding company, in particular the spin-off of Axtell as we have discussed in the past.

Thank you. Thank you, Eduardo. You're welcome.

Our next question comes from Emilio Fuentes of GBM. Please, sir, go ahead.

Hi, thank you for taking my question. I have further questions on Sigma, but as for now, I'm wondering what will happen to the holding structure post-Alphex spin-off, and if you have any current plans on Alpha's other assets, what will happen to them, or will they be transferred to Sigma? Thank you.

Thank you, Emilio. This is Eduardo again. Let me... talking a little bit about the way we see the holding company. We still have some services that are provided by personnel here in the holding company, mainly related to issues of the holding company, accounting, reporting, and this process is actually related that we're going through. We plan to reduce those internal functions going forward as soon as possible. That's what I was referring to as housekeeping items going forward in one of my previous comments. We do provide very few services to the companies, including Sigma, and all those services are provided today on an arm's length basis. They receive those services and We expect going forward to reduce them significantly and basically disappear them. As we continue doing, we have been doing the last few years since 2020, moving people from alpha to the companies, to each one of the companies in order for them to be fully complete in terms of having their functions, the areas in-house.

If I may add to that, the idea is to have the four businesses, Axtel, Alpec, Sigma, and NEMAC as fully independent companies. That's the whole idea. I guess the other big asset that we still have here is the land that we have here at the corporate offices. Just to remind you, this office is not only used by Alpha, it's used by some of the people here at the at the corporate offices by some of the companies. And as Eduardo said, this is on our land basis, but we charge them rent for these offices, but they are free to move to any other place they want. And this is just why the corporate offices or the land is... We're in the active process of... valuing it and deciding what we're going to do to it. We believe that there's the possibility to develop it or to sell it as is. But I would like to ask you not to concentrate on that. I think we have finally made the four companies independent, and I think that's what is important. I guess the right word that's being used here is housekeeping aspects that we will do in the next few months to finalize everything and have the companies become completely independent.

Thank you. May I have a follow-up question? Regarding fiscal credits, will there be any remaining credits on the holding post, Pino?

No, Emilio. The plan is to pay down debt at the holding company. And we... And we do have some additional fiscal credits in the holding company, which we will see if there is use for them going forward.

Thank you. Very clear.

You're welcome.

Our next question comes from Nicolas Riva of Bank of America. Please, sir, go ahead.

Thanks very much, Hernan and management team, for the chance to ask questions. I have three questions. The first one is going back to an earlier question about the M&A. The news really related to potential M&A of Sigma being potentially interested in Oscar Mayer in the meats business of Kraft. And you have addressed it to some extent. In my case, again, I would be, given that right now, both Alpha and Sigma are very focused on this spinoff of Alpec. And as you said, keeping the investment ratings of both sigma and alpha, I would be surprised of alpha and sigma pursuing such a large amount in the sense that the numbers I think referenced by Reuters in that article were $300 million in annual EBITDA, potentially 10 times EBITDA for enterprise value, $3 billion. that definitely will have an implication in terms of ratings for both Alpha and Sigma. So again, any additional comment regarding this would be useful. Second, I know Sigma is going to be guaranteeing the $500 million on the 2044 bonds of Alpha. Any additional debt that Sigma will be guaranteeing of Alpha besides the $500 million on the 2044s? That's my second question. And then my third question, as you said, you are not providing financials for Alpha considering Alpec discontinued operations, so we can see leverage excluding Alpec. The number that I have seen for net debt is $2.8 billion. And from memory, I believe that was going to be the net debt of Alpha including debt repayment at the holding company level of about $500 million. Now we are including $575 million. But anyway, I thought that $2.8 billion in net debt excluding Alpec was going to be reached only after repaying these $500 million in debt at the holding company. So I wanted to ask about reconciling the figure provided before and now this figure, because I would assume that you haven't included yet as of September, the debt repayment and the holding company level using the proceeds from the capital increase and from the dividend from ALPEC. Thanks.

Hi, Nicolas. This is Hernan. Thank you for your question. Regarding the first item about the news, sorry, but we have no comment about that topic. So we'll move on to your other two questions. And for that, I'll ask Eduardo to jump in, please.

Sure, sure. And thanks, Nicolas, for bringing these topics. Regarding the guarantee, the way we look at the debt that will remain at the holding company after we pay down the $575 million coming from the capital increase and the dividends from Alpec and Sigma. We look at that debt together with the debt of Sigma as one entity. We see Sigma now, together with Alpha, as one entity with one debt of which Sigma will be handling financially. Regarding expected... Leverage for the combined entity, we do expect after we finish this pay down of debt to have the combined entity very close at the end of the year, very close to two and a half times, which is the target. that we have set up to maintain for the company. It will, of course, depend on the performance and results of Sigma during the fourth quarter, but we are confident that we will move very close to two and a half times.

But one follow-up there. At the end of September, with these numbers, you had not yet included the debt repayment of the $575 million at the holding company level. Is that correct?

Correct. And the reason is very clear. We haven't received the $400 million capital injection, which we expect to have by November 4th. We did include the dividends from Alpec and from Sigma that were paid before the end of the quarter.

Okay, and just one more follow-up. Given that for now Alpha and Sigma are two separate entities, just to clarify, the debt from Alpha that is going to be guaranteed by Sigma is going to be the $500 million from the 2044 bond of Alpha, and what else?

$200 million of bank debt.

Okay, thanks very much.

Our next question comes from Andres Ortiz of BTG Pacto. Please, sir, go ahead.

Thank you, Andres Ortiz from BTG Pacto. Thank you, Alvaro Eduardo. Just a quick question on my side. Looking at the financials, I see a next benefit at the alpha level this quarter. Just want to understand why that happened given the such strong results in the quarter. We're going to understand it. Thank you very much.

Andres, I'm sorry, but the question did not come through clearly. Could you please repeat it?

Sure. Looking at the financials or the I'm saying a $97 million tax benefit or $3.9 billion taxes tax benefit. I just want to understand why did it survive before

No, I believe it's about the question is about the tax benefit. You have income before provision.

And I think the tax provision that is positive.

I will try to answer the question as we understood it. As we understood it, there is a $97 million tax benefit that we show in the report. And you want to know where that is coming from, right? Yeah. Okay. Let me address that. When we spun off Axtell, the tax shield that we obtain is not reflected in the accounting only reflected on the fiscal front of the company. So what we did at this time was we included a portion of that tax yield that we estimated was going to be used for the spin-off of Alpec, in addition to what we already had coming from the regular operations of the holding company. So that's why you see that as a benefit, which will be used when the spin-off of Altec is completed.

Wonderful, Stu. Thank you very much. You're welcome.

There are no further questions at this time.

There are no further questions on the chat either. So in that case, we will then take questions on Sigma. Roberto Olivares, Sigma's CFO, will answer your questions. Operator, please prompt for questions on Sigma.

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

Our first question comes from Ricardo Alves of Morgan Stanley. Please, sir, go ahead.

Thank you very much for the follow-up. Mexico was strong, but the biggest beat versus our numbers, Roberto, came on the US side, so I wanted to focus on that region. When we're looking at news or the data on the margin, the numbers seem even more impressive. We're still seeing 6%, 7% top line expansion. Can you expand on the U.S. a little bit as we go into the fourth quarter? And not only what your expectations are to close out the year, again, the numbers that we see are encouraging to us. I'm curious to hear your thoughts on that. But also, Can you explain the competitive dynamic as well? Because on top of a good top line, we're also seeing Sigma gaining share. In hot dogs, in cold cuts, across the board, we see not only top line trends that are optimistic to us, but also margin gain. So if you can expand on those two points, your relative positioning versus competitors, what is driving that? but also your overall expectations to close out the year. That would be helpful. Thank you so much.

Thank you, Ricardo, for the question. Yes, first, the U.S. team has done a fantastic job in... trying to capture volume and also profitability. We have grown particularly in our mainstream and Hispanic business markets. I will say in both equally, but we have seen in the Hispanic business very good dynamics that we expect to continue being present in the following years. almost at capacity in most of our plans and with some revenue management initiatives being able to sustain some of the margins. We have also worked a lot on efficiencies. I would say not only in the U.S., but also in Sigma overall, trying to optimize some of our SG&A and expenses across the company and particularly in the U.S. that has helped. We do expect to continue having this strength in the following quarter and I would say year. There's still some opportunity to grow. There's a third business that we have in the U.S., our European heritage business that has a lot of potential that we expect to help us continue to gain some margin.

helpful thank you roberto the the top line is strength on on on the margin of the recent data in october is that a a fair assessment that things are just holding up well is that a fair assessment of your us operation today yes that that is correct as you have mentioned we have been i would say a lot through consistency quality and innovation for products as you mentioned we have

seeing that we have gains on market chart, we do expect to continue operating at that level.

Very helpful. Much appreciated. Thank you, Roberto. Thank you, Ricardo.

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

Hi, Fatim. Thank you for taking my question and congrats on the very strong results. Regarding the growth business units, particularly the plant-based proteins and the direct-to-consumer e-commerce platforms, what's your expectation as we look out to 2025? And specifically on this direct-to-consumer e-commerce platform, how You mentioned in the report that it still represents a little single digit of consolidated sales, but I would like to know if you can give us some color on where you see this ratio going forward. Thank you very much.

Okay. So, regarding the e-commerce direct-to-consumer platform, this is a business that we launched back in 2020, and it has grown significantly. I would say almost double-digit Growth on a monthly basis since we launched it, we launched. Uh, uh, uh, sorry, as a, as a website and an app and now we have some physical stores in Mexico. To sell directly to consumers, some products that. goes to the grill, and particularly steaks and some other of our products. We also complement that business with another business that sells direct to home some of the products that we have in our portfolio. And we're expanding, actually, that business into the U.S., We're already piloting some initiatives in some markets in the U.S. that we think will be good environments to grow. And we, as you mentioned right now, the percentage of revenue coming from grow business units and particularly this initiative is low. you have seen, different new business models. I talked in my initial comments about the business that we have that is called Netport. That is a business that distributes and sells third-party products from Mexican or Latin American heritage into the U.S. Hispanic market. We recently launched a new brand They're particularly focused on Central American products, cheeses, to be specific. We have covered almost all of the portfolio Mexican cheeses with our acquisitions through the year, and we're a relevant player in the Mexican-Hispanic cheese market in the U.S. Now with this new business, we're trying to explore the Latin American, particularly Central American, Hispanic cheese market. So all basically between a pilot and a scaling phase, and we do expect them to become more relevant in revenues and data in the following years.

Got it. Thank you very much. Thank you, Juan.

Our next question comes from Emilio Fuentes of GBM. Please, sir, go ahead.

Hi, thank you for taking my question. I'm wondering if you could give us any further color on your margin, particularly in Mexico. Have you seen any FX impact or do you expect any delay in this impact on inventories if you haven't seen it yet? And another question, I'm wondering if you're still looking to divest non-core assets or brands in Sigma. Thank you.

Thank you, Emilio. Your first question regarding the margin in Mexico, we do anticipate that in the fourth quarter we see some, as you can see, effects volatility that could potentially impact the margin. In terms of raw materials, we don't see any major disruptions, to be honest. We have already some inventory in place of the major raw materials that we use. And in terms of effects, again, we're doing some revenue management initiatives to offset the cost impact. Just to be clear, I think during the third quarter, we also experienced some benefits regarding some effects derivatives that we have that impacted costs. That we were mainly doing the 3rd quarter. There's still some hedging for the 4th quarter for, to be honest, just a couple of weeks. So there's that positive impact in the 3rd quarter in Mexico because of that. And let me talk about your second question regarding the non-core asset monetization. We, as we have talked in the past, we're looking into some opportunities, particularly because of our fiduciary responsibility to entertain some offers when there's someone interested in some of our assets that make sense for them. As we have discussed in the past,

Thank you. Very clear.

There are no further questions at this time.

Okay. No further questions in the chat either. So in that case, let's move forward and take questions on ALPEC. We have Jose Carlos Pons, ALPEC's CFO. Operator, please prompt for questions on ALPIC.

Dear participant, if you'd like to ask a question about ALPIC, please use the raise your hand button of your Zoom tool. There being no further questions, I would like to return the call to management.

Thank you. So let me turn the call back to Alvaro for closing remarks.

Thank you, Hernan. This is an exciting inflection point for ALPHA, finally leaving behind the conglomerate structure and clearing the way for independent business units that have full control to trace their individual futures. Each business will continue working relentlessly to reach their fair value. This is particularly important for Alpha Sigma as a new brand for food pure plate. We greatly appreciate all the support we have received from market participants. We are especially thankful to all the Alpha team members for their hard work throughout this amazing journey. Thank you very much for your interest in Alpha. If you have additional questions, please feel free to reach out to us. Have a great day. We will now disconnect.

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