Alfa SAB de CV

BMV:ALFAA

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, and welcome to ALFA's First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

Now I would like to turn the conference over to Mr. Luis Ochoa, Vice President of Corporate Communications. Mr. Ochoa, you may begin.

[Luis Ochoa, executive]

Thank you. Good afternoon, and welcome to ALFA's First Quarter 2018 Earnings Conference Call. Additional details about our quarterly results can be found in our press release, which was distributed yesterday afternoon and is available on our website in the Investor Relations section.

As a reminder, during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. Therefore, actual results could vary from those mentioned in this conference call.

Joining us today will be: Álvaro Fernández, ALFA's President. Mr. Fernández will provide an overview of ALFA's consolidated financial results for the quarter, as well as some significant events for each of the subsidiary. He will conclude his presentation discussing full year guidance. At the end of the call, we will take all your questions. Álvaro, you may begin.

[Álvaro Fernández Garza, executive]

Thank you, Luis. Good afternoon to everyone, and thank you for joining our call today. I'm going to begin by providing a brief overview of consolidated financial results for the quarter. Then I'm going to focus on some key events for each of the companies that are representative of the strong execution of our long-term strategy. More specific details about the quarter were provided during the respective conference calls held earlier today.

To begin, following a challenging 2017, the current year has started much stronger and we are pleased with first quarter '18 results.

During the period, we experienced less commodity volatility than in the past. In fact, in many cases, commodity prices were more favorable for us. Specifically, oil and gas prices rebounded and were at the highest level since 2015. Food prices by contrast were mixed with the appreciation of the peso vis-à-vis the U.S. dollar eased the cost pressure of these raw materials. And across all the regions in which we operate generally, we saw more favorable performances.

As a result, ALFA reported higher first quarter '18 revenue and EBITDA versus the same quarter in 2017. Consolidated sales were up 14% to $4.6 billion. This growth reflects higher revenue in all companies driven by improved volume and price increases in certain markets as well as contributions from acquisitions. All the subsidiaries delivered double-digit revenue growth over the same period in the prior year. With improved margins in many of the businesses, first quarter '18 consolidated EBITDA was up 19% year-on-year, as all companies reported better results over first quarter '17.

And lastly, all subsidiaries continued to make progress on their investment plans and total CapEx for the quarter was $185 million.

During the quarter, the companies also made significant progress executing on long-term strategic initiatives. I will now provide some key highlights about this event. Let's start with Alpek.

The most significant event for the company was the resolution of the M&G Corpus Christi project. Alpek, along with its 2 partners, submitted the winning bid and will be acquiring the asset for approximately $1.1 billion. The partners will each be taking 1/3 of the PET and PTA production. We're very pleased to move forward on this matter.

For the M&G Altamira plant, the company is still working on a restructuring plan and is currently operating on the [ selling ] agreement. The process to finalize the sale of Alpek's 2 cogeneration power plant in Mexico is moving forward as the 315 megawatt Altamira plant's construction is on track to be completed before year-end. However, issues in the implementation of regulatory changes in Mexican power tariff have waited on timing.

Alpek was busy on the financing front as well. The company signed a 3-year dollar-denominated senior unsecured agreement of up to USD 710 million, which provides additional financial flexibility to refinance existing short-term debt and bridge finance, the acquisition of the PetroquímicaSuape and the Corpus Christi project.

Net proceeds from the potential sale of the 2 power cogeneration plants will be used to pay down the loans balance. Alpek's financial results continue to improve with revenue up 19%, mainly due to higher prices. Both the Polyester and the plastic chemicals benefit from better oil prices and related raw materials, which in turn helped to drive improved margins, and EBITDA increased 15% in the quarter.

For Sigma, on the operational side, it is all about maximizing efficiencies and strengthening its innovation platform to closely follow consumer trends across all markets. But during first quarter of '18, the key event was the strengthening of its balance sheet.

Towards the end of the quarter, Sigma issued a $500 million bond with a coupon of 4.875%, and a maturity period of 10 years. Sigma used the proceeds to redeem the 2022 notes that have been issued by Campofrío in 2015. The average life of Sigma debt is now 7 years.

Additionally, the company entered into cross-currency swap transactions to change part of its dollar debt to pesos. To that end, Sigma swapped its $250 million bond, 2019 bond. And subsequent to quarter end, the company swapped its $200 million of its 2026 bond.

During the quarter, Sigma reported higher revenue in each of its key geographic regions, supported by slightly higher volumes and better prices. The quarter results also benefit from the consolidation of 2 acquisitions in 2017. The 20% increase in EBITDA was largely due to good performances in Mexico, the 2 acquisitions I just mentioned, and a more favorable FX environment.

Nemak's strategy is focused on growing its structural and electric vehicle component business and we made good progress, winning new contracts worth $50 million in the quarter. Some of the noteworthy wins include new programs for battery housings and brackets. And a contract for a passenger cars of a German OEM, which represents the first nonpremium brand to be adopting this technology. The most recent wins bring Nemak's total earned business to date in this exciting segment to approximately $370 million in terms of annual revenues.

Total contract wins in the quarter were $110 million with the full amount representing incremental volume. Nemak's revenues in the quarter were up 10%, largely attributable to higher aluminum prices and the appreciation of the euro against the U.S. dollar as total volume was down 1%. EBITDA increased 4% due to operational efficiencies and increased sales of higher value-added products. Additionally, there was less of an adverse impact from metal price lag when compared with the same period of the prior year.

Moving on to Axtel. During the quarter, the Red Compartida project is sponsored by Altán Redes went live on March 22, a milestone for the industry and for Axtel as it successfully deployed metropolitan links, fiber capacity, colocation and data center services.

The new mobile capacity of Red Compartida should represent a valuable asset for the industry and also for Axtel's own mobile strategy. In addition, the company completed the sale of towers, and it still continues to focus on its digital transformation. Sales of additional assets is being analyzed or are in progress.

Axtel, 11% revenue growth in the quarter was primarily due to growth in managed networks and IT services in the core Enterprise and Government segment. EBITDA growth, ex the $6 million gain from the tower sales, was 16%, mainly due to a better performance of the Enterprise and Government segment and favorable FX.

Lastly, Newpek. On the last earnings call, I laid out Newpek's long-term plan to divest most of its U.S. assets and to continue to analyze small opportunities in Mexico. I am pleased to report that towards the end of the first quarter, Newpek announced it signed a purchase and sale agreement to sell approximately 1,900 net acres in the Eagle Ford Shale for $90 million. This is being done in conjunction with its partners, Pioneer Natural Resources and Reliance.

Following the sales, the sale of Newpek's acreage position in the Eagle Ford Shale will be approximately 11,000 net acres, which Newpek also plans to divest and a data room has been opened to facilitate the sale.

This ends my discussion about the individual companies. Moving on to guidance. With respect to guidance, for the full year, we're maintaining the guidance we provided on our last call in February. To summarize, we look forward, we're very pleased with the results in the past quarter. However, we are facing a presidential election this year, which past experience has proven to create more collateral macro and consumer-spending conditions. We're cautiously optimistic about the current market conditions for our businesses for the remainder of the year. At the time, we need to maintain flexibility to take advantage of opportunities the market conditions present to us. This concludes our discussion of the first quarter results. We will now take your questions.

[Luis Ochoa, executive]

We would like to begin the Q&A session with questions on ALFA. Mr. Álvaro Fernández, ALFA's President, will take questions on ALFA and on corporate matters. Operator, please instruct participants to queue for questions on ALFA.

[Operator]

[Operator Instructions] And we'll now take our first question from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

I guess, I would like to know -- when you talk about the guidance for this year, at the beginning of this year, you mentioned the 2% recurring EBITDA growth. Given that the recurring EBITDA, at least per our calculation, was 20% up the first quarter, does this mean the next quarters will be much tougher? I understand, you know that we are in a year of uncertainty in Mexico but it seems that the business are doing okay. And then also on the free cash flow, I mean, it was negative in this quarter but, I mean, that's the usual thing for the companies. So I was just wondering if -- since you were also mentioning at the beginning of the year that one of the commitments was going to improve the free cash flow via working capital efficiencies and CapEx. What are you aiming for in terms of free cash flow? And finally, just one last thing, if maybe you could update us on the management with the departure of the previous CFO. Do you have like any updates on the management changes? And I guess that would be it on my end.

[Luis Ochoa, executive]

Yes, Mauricio. Regarding the guidance, I think it's too early. Even when we had a great -- a very good start of the year in all of our companies, it's too early to change the guidance. And as you mentioned, we have a large amount of uncertainties for the rest of the year in terms of presidential elections here in Mexico. And we would rather wait until at least the second quarter to have a better view of the upcoming months and trends to update any guidance. So at this moment, that's why we're keeping our guidance that we provided back in February.

[Álvaro Fernández Garza, executive]

Yes. We want to make sure that the numbers we provide, we will comply with them as the year goes by. So as Luis said, I think, it's very important for us to be optimistic but wait a little bit, maybe another quarter to change the numbers.

Regarding the cash flow, you're right. Even though EBITDA was better, the cash flow or the debt -- net debt was higher. And basically it has to do -- because even in the CapEx terms, we're a bit lower than our guidance of $900-plus million. We spent $195 million -- $185 million. So we do expect to -- CapEx to catch up a little bit. So -- but the main problem was net working capital. It's always the case specifically in -- or especially in Sigma and a little bit in Nemak, that we have these issues during the first months of the year. I'm very confident because it's something that I'm placing a lot of emphasis that we will strongly reduce net working capital and, therefore, provide enough cash flow to reduce debt.

And regarding the CFO process, all I can tell you is that the process is in place. We are actively looking for a replacement of Mr. Ramon Leal. And we should have some news in the next few weeks. And we'll let you know in time when we have made some progress in that regard.

[Mauricio Serna Vega, analyst]

Okay. Okay. Great. That's very helpful. Just very briefly on net working capital. Do you have like any guideline of how much you're aiming to reduce or improve, I don't know, in terms of days, in terms of amount through this year?

[Luis Ochoa, executive]

No, Mauricio. At this moment, we -- I mean, as Álvaro mentioned, we are always trying to improve our, you know, all of our metrics. But at this moment, I don't have a figure that I could provide. And I just want to reiterate that the effect of this quarter is the usual effect that we have -- seasonality effect in Nemak and in Sigma.

[Operator]

[Operator Instructions] We'll now take our next question from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

This is regarding the sale process of assets under Newpek. When -- if you could provide an estimated time line, and mainly what would be the use of the resources?

[Raúl Millares Neyra, executive]

[Foreign Language] Raúl Millares. Well, on the sale of the remaining of the Eagle Ford, we are actually into the process. We already have several companies looking at the data room. It's a very, very, very strong process, as you know [indiscernible] very important investment last year to prove that with the new technology, the productivity of the wells in the area is much better than what we had before. And that joins me with the movement of the commodity prices [indiscernible] process. So far, what we are looking for is to have a -- some kind of first round of it, sometime in the middle of the May. And then from that point of view, well, probably we'll be looking at the closing the third quarter of this year with the sale of the remaining of the Eagle Ford. And it will all include other formations for us which is Edwards formation, which is in the same region. So that's more or less where we are looking at it. Of course, the resources of that will be to help the situation that we have. Most of our idea is to clear only quick reserves, pay debts. And from that, we will see what ALFA is [indiscernible] about regarding continuing investing where we had to according to what's already explained by Álvaro during the beginning of the year.

[Operator]

[Operator Instructions] There are no further questions at this time on ALFA. I would like to turn the call back to Luis.

[Luis Ochoa, executive]

Okay. So let's move with questions on Alpek, please. Alpek held its earnings conference call earlier this morning and Mr. Eduardo Escalante, Alpek's CFO, is here with us if there are any additional questions. Operator, please instruct participants to queue for questions on Alpek.

[Operator]

[Operator Instructions]

[Luis Ochoa, executive]

Okay. So let's continue with questions on Nemak. As in ALFA's case, Nemak's held its own earnings conference call earlier this morning. Mr. Alberto Sada, Nemak's CFO, is here with us, if there are any additional questions. Please instruct participants to queue for questions on Nemak.

[Operator]

[Operator Instructions] And we'll take our first question from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

Yes. I wanted to ask a -- your general view about the exposure of Nemak to different changes in trade policy between U.S. and China, and your current view of how the NAFTA negotiations have evolved in and any view that you want to share from the Nemak perspective on those topics.

[Alberto Sada Medina, executive]

Sure, Vanessa. This is Alberto. Related to the first part of your question on trade policy changes that the U.S. is pursuing, particularly the one with China. The exposure of the auto vehicles to the China trade is relatively small. Talking about less than 2% of vehicle export from the U.S. to China. So there, we don't see any major effect on our end. It's a relatively a small exposure. And related to NAFTA, I think there has been a lot of news on the market around the progress of those discussions. It seems that it's going in the right direction. So far, none of the items that have been placed in the table of negotiations and they are still open may have an effect on Nemak. So we feel confident about our position to withstand the trade situation -- potential changes to trade situation also between Mexico and the U.S. And you recall from that side, any type of exposure on our end is limited to the amount of business that we do between Mexico and the U.S, which accounts for close to 20% of our sales.

[Vanessa Quiroga, analyst]

That's useful. Can I take advantage and also ask you about your outlook for the auto sales trends in your relevant regions?

[Alberto Sada Medina, executive]

Yes. Well -- yes. The trends haven't changed from what we discussed last time when we guided our results. I think in general, when we see the major markets where we operate, the first one is the U.S. The U.S., we had a regional expectation of that market to be around 16.9 million vehicles. Given the relatively positive performance in the first quarter for the U.S. due to the positive economic situation, that number may be slightly better than that. Some analysts are already saying that it could be up to 17 million units. So we see the U.S. relatively strong. In Europe, we also continue with the same trend, where we're seeing the eastern part of the European market perform a little bit better. And that was already incorporated in our earlier views with the total region to be increasing somewhere in 2%. And then last but not least, for our us rest of the world, remember that Asia and South America. Asia continues with also some growth, very strong market. And we're expecting 2% growth in 2018. And South America is performing quite well. And that's an industry -- a region where we're also gaining share of sales. We're launching several new business in anticipation of the customers anticipating a stronger market, as well as a little bit more aluminum penetration on the block side.

[Operator]

[Operator Instructions] We'll now take our next question from Jose Vazquez with GBM.

[Jose Vazquez, analyst]

I was wondering if you could elaborate more on the recently contract that you signed with a Chinese partner to develop structural components over there.

[Alberto Sada Medina, executive]

Well, I mean, as you know, we have been very active -- thanks for the question, Jose, on this market. And as we highlighted that the pipeline that we have on new contract stands at $370 million with $50 million of new business gains this quarter. And that was on different regions. We're seeing activity in other regions in Europe, in North America and China is clearly not an exception. And lately with the changes that we are seeing in also in environmental policy in China, there have been a lot of activity around the electric vehicles and structural components side to achieve potential improvements in our relations. So, yes. We're very active and this contract that we signed, unfortunately at this point, we cannot disclose the name of the company. But certainly, I think it's proved that the market is developing in that direction and that the customers are seeing Nemak as a good supplier to this type of component. So, I think this is, again, an example of what's entering into this segment in China where we continue -- we expect to continue seeing more business developing there in this market.

[Jose Vazquez, analyst]

Okay. So just a quick follow-up. Considering that you have already production in Mexico and in Europe from several components. How would -- would we see the breakdown between the 3 regions for this specific component in terms of, I don't know, Europe maybe 50% right now, and North America, maybe at 30% and then the rest for China just to understand how much it is distributed between regions?

[Alberto Sada Medina, executive]

Sure. Sure. Now the majority of the activity on structural entities was, let's say, first 3 year more in the European markets, so that's -- at this point, we're seeing a little bit more concentration on that, followed by the U.S. and lastly, this new need that we're seeing in China. Eventually, we'll see them all at the same level. But at this point, it's a little bit more concentrated in Europe than the rest of the regions.

[Operator]

There are no further question at this time on Nemak. I would like to turn the conference back to Luis.

[Luis Ochoa, executive]

Yes. Thank you. We will then take questions from Sigma. Mr. Eugenio Caballero, Sigma's CFO, will answer your questions. Operator, please ask people to place questions on Sigma.

[Operator]

[Operator Instructions] We'll now take our first question from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

First on Mexico, I'd like to -- if you could comment a little bit about the pricing and volumes. How's that reflecting the sales growth that you reported? So how are you seeing the consumer environment so far this year? And finally, on Europe, I mean, you had the benefit of FX, but I wanted to get a sense on when would you expect to, I guess, achieve some of the margin expansion from -- now that you've -- completely done with the investment of the Bureba plant. It seems what you mentioned in the press release was that you are investing some of that -- some of those gains in the market enterprises. So I just wanted to understand like when we'll be seeing a material improvement in the profitability of the European business.

[Eugenio Sada, executive]

Thank you for your question. So starting with Mexico, we are growing on both fronts, volume and pricing for the first quarter. And as Álvaro mentioned a little bit at the beginning, we -- every time we get some macro stability in a company like Sigma, it's a good place for us to get growth. First quarter of last year was tough for us because of how much volatility we had. And so it's hard to keep on growing when you've been increasing prices so much and that's something that we didn't have on this last quarter. So with some price increases, particularly, compared to last year, we've been able to sustain both growths. Our growth in Mexico in pesos was strong with 23%. And that's also a reflection on that growth, that price and stability on the raw material side at the same time. The consumer confidence is better than last year for Mexico. However, it's been coming down the last couple of quarters. But as you know, that doesn't necessarily is a big reflection of what -- what the market's consumption are going in our market like Sigma where we have a lot more stability than the consumer confidence index. Mexican and [ TAD ] reports, Mexican food sales at around 6% for the quarter compared to 4% we had last year. So I guess, we do have a little bit of good news on that front as well.

On the European side, you're right. And we just finished the new -- the ramp-up of the new facility. We did still have some extra co-packing cost for the first quarter of this year. Most of March was done without co-packing. So we don't see the benefit of that yet on the first quarter. We do expect to see margin improvement, particularly in the second half of this year. We are also reinvesting some of that more on the first half than on second half on marketing and innovation. And that's including Mexico as well on Europe. But in spite of that, we still see margin improvements that should bring us closer to the 100 basis points we're expecting in margin improvements for Europe for the year.

[Mauricio Serna Vega, analyst]

Okay. Got it. But if I understand right, on your guidance, you are expecting flat margins for the entire business. So -- I mean, that would mean that whatever margin expansion you're going to get from Europe, that's going to be eroded somewhere else, I guess? And on the other hand, maybe you could provide me a bit more figures -- provide us a little bit more figures on the growth in Mexico. Top line, how much did it come from volumes? And how much from pricing?

[Eugenio Sada, executive]

Sure. So now, the thing with last year's margins, you have to remember that we had one-off benefit from the Romanian acquisition, a little bit more than $20 million related to those acquisitions that were not free cash flow. And so really, without that effect, last year's margins were close to 10.8%. So the guidance is a little bit higher than last year's margin when you take into account that effect. And most of it, in our guidance, is coming from what I just mentioned in Europe.

Now related to Mexico, volumes and pricing. We normally don't release the exact figures. I can tell you it's a little bit more coming from price than on volume in peso terms. Even more on dollar terms because of the strengthening of the peso. But really both are playing a factor here.

[Operator]

[Operator Instructions] There are no further questions at this time on Sigma. I'd like to turn the conference back to Luis.

[Luis Ochoa, executive]

Yes. We will now take questions on Axtel. For that purpose, Mr. Adrian de los Santos, Axtel's CFO, will answer on behalf of Axtel.

[Operator]

[Operator Instructions] We'll now take our first question from Eduardo Altamirano with HSBC.

[Eduardo Altamirano, analyst]

Out of curiosity, what segments of the business are you currently investing in those? Or which ones do you -- are seeking to divest out of most in pursuing -- now that you mentioned on the call that you are actively seeking to sell out. Just to get a little bit more clarity there.

[Adrian de los Santos Escobedo, executive]

Yes. Eduardo, the CapEx in the first quarter was $29 million, out of which $5 million went into the mass market segment. And the other $25 million was split between maintenance and network capacity, primarily for the enterprise segment and direct investments to grow revenues on the enterprise segment.

[Eduardo Altamirano, analyst]

Okay. Perfect. In terms of specific assets you're looking to sell, are you free to comment right now on that? Or would you rather not?

[Adrian de los Santos Escobedo, executive]

Yes. We have the analysis of whether to divest the mass market segment as we have mentioned. And in addition to that, we are optimizing capacity utilization in our network. As you know, we have 3 networks under Axtel: the Alestra network; also, we have Antel and Axtel. So we have significant fibers front. We are optimizing, and eventually, we'll come up with approximately 13,000 kilometers of fiber that we could monetize. That process is underway. We have to optimize the utilization. And perhaps, in the second semester, have further detail.

[Operator]

[Operator Instructions] There are no further questions at this time on Axtel. I would like to turn the conference back to Luis.

[Luis Ochoa, executive]

Thank you. We will move forward and take questions on Newpek. Mr. Raúl Millares, ALFA's Senior VP Energy, will take care of them.

[Operator]

[Operator Instructions] We'll now take our first question from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

Raúl, I have a question for you regarding the progress in projects in Mexico. Can you provide us an update, please?

[Raúl Millares Neyra, executive]

Yes. Sure, Vanessa. Well, basically, the point that we have is the 2 areas that we won last year in the [indiscernible] region, and we are advancing according to the plan by putting together the group and making all the regulatory things that you have to do, approvals, everything that we have. We already have a team in the region that is now working in developing the plan, start working on the area. Basically, that is moving according to what we have planned before. On the part of Mexico, well, we continue to operate it, yes, that we have is contracts with payment. We have been successfully keeping production, which has now declined even [indiscernible] are very old and very exploited fields and we can be very successful in keeping them operating with really very limited investment and a lot of efforts in reducing the cost. So I think that is what we can talk about the current situation in Mexico. As of course, we will look at the new realms. It's too early to see whether we will do that, but we are actively looking at those opportunities basically online.

[Vanessa Quiroga, analyst]

Okay. Are you currently working on any migration possibility of that contract that you have or is that on hold?

[Raúl Millares Neyra, executive]

No. We've been working for many years, but you know it's difficult to advance. The most advance of it is really the San Andreas area in which we are ready. We've been ready already for almost 6 months for PEMEX to approve the integration. This mostly depends on internal progress of -- that PEMEX has to bring it to its own board then it has to be approved by the Board, which has been, for one reason, are delayed, and we have -- but everything is ready. It should be done, hopefully, in the next month that we can at least make the -- have the approval from PEMEX board to migrate the San Andreas operation. That is -- as you know, the experience has been -- it's a lot of uncertainty whether it would happen or not. It doesn't depend on us.

[Operator]

There are no further questions at this time on Newpek. I'd like to turn the call back to Luis.

[Luis Ochoa, executive]

Yes. Thank you. Well, we want to thank you all for your interest in ALFA. And we will expect to continue our open dialogue with you. If you have any additional questions, please feel free to reach out to us by phone or e-mail. We will be pleased to assist you. Thank you very much.

[Operator]

That concludes today's presentation. Thank you for your participation. You may now disconnect.