Alfa SAB de CV

BMV:ALFAA

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, and welcome to ALFA's First Quarter 2022 Earnings Conference Call.

[Operator Instructions]

As a reminder, today's conference is being recorded. Now I would like to turn this conference over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin.

[Hernan Lozano, executive]

Thank you, Laura. Good afternoon, everyone, and welcome to ALFA's First Quarter 2022 Earnings Conference Call. Additional details about our quarterly 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, ALFA's CFO; Roberto Olivares, Sigma's CFO and representatives from each ALFA company.

I will now turn the call over to Eduardo.

[Eduardo Alberto Castillo, executive]

Thank you, Hernan. Good afternoon, everyone. I hope you and your loved ones have remained safe and healthy. We are pleased to deliver another outstanding quarter, led again by solid results from Alpek. Double-digit growth in first quarter revenue and EBITDA placed ALFA in a favorable position to exceed its initial 2022 guidance. Also important is the consistent progress with our unlocking value plan and our full commitment to this transformational process.

With respect to consolidated financial results, first quarter revenue was $4.2 billion, up 24% over the same period of the prior year. Similarly, EBITDA increased 20% to $644 million, a record high first quarter for ALFA. By subsidiary, Alpek's results exceeded expectations, once again, as the positive momentum from 2021 carried over into this year. Specifically, Alpek continues to benefit from high reference margins across its core products of polyester, polypropylene and expandable polystyrene. Solid demand, coupled with low marine freight availability, supported higher-than-expected petrochemical margins.

In contrast, Axtel and Sigma were impacted by unexpected headwinds that resulted in lower EBITDA year-over-year. Axtel was negatively impacted by further delays in implementation of customers' project caused by the global semiconductor shortage. Lower government segment sales and lower revenues from a large wholesale customer. For Sigma, headwinds included higher energy and input costs at the European operations, which Roberto will cover in more detail.

I will now turn the call over to Roberto Olivares, Sigma's CFO, to discuss the company's first quarter results and progress on strategic initiatives. Please, Roberto.

[Roberto Olivares, executive]

Thank you, Eduardo. Good afternoon, everyone. I hope you and your families are safe and healthy. Let's go right into the business update portion of the presentation for an overview of our operational and financial results as well as recent strategic developments. Consolidated revenues reached $1.7 billion, the highest first quarter in our history and 6% above year-on-year. This was driven by record first quarter figures in Mexico, the U.S. and Latin America, and they were partially offset by a decline in European revenues. Quarterly consolidated EBITDA was $161 million, an 11% decline year-on-year because of higher-than-expected cost increases due to the Russia-Ukraine conflict as well as lower pork exports to China, which jointly impacted European operations.

These results more than offset the solid performance of the other Sigma regions. Specifically, the conflict has caused significant energy and raw material cost increases in Europe, including higher a energy, fuel, meat, ingredients and packaging. In response to this situation, our revenue management and global supply teams are taking all the necessary actions to mitigate these impacts.

For example, we implemented the first phase of pricing actions and are in final negotiations for a second phase that will be fully executed in the next months. In addition, we are actively seeking alternatives to reduce energy consumption and achieve greater operational efficiencies.

Overall, and despite this, results in the other business units, namely Mexico, the U.S. and Latin America were better than expected. Therefore, our 2022 guidance remains unchanged. However, we will continue to monitor the situation proactively. Moving on to strategic initiatives. I want to briefly discuss the formation of Sigma's new Advisory Board.

We believe that this is an important step to enhance long-term value creation as we advance towards becoming a fully independent business. Our world-class Board is made of 13 talented individuals with diverse backgrounds and nationalities, 8 of whom are independent and 4 are women with expertise that is closely aligned with Sigma's overall strategy. Their experience includes strategic planning, retail, nutrition, entrepreneurship and ESG, among others, all of which we believe will greatly complement our overall capabilities.

With regard to growth initiatives. This quarter, we launched the third addition of Tastech by Sigma, our business accelerator that seeks to transform the food industry. New companies from all around the world will join more than 490 start-ups from 32 countries that participated in the first 2 additions.

During the quarter, we also began operating our third-party distribution and commercialization business that connects companies with nostalgia and specialty products from Mexico and Latin America with consumers in the U.S. by leveraging our Hispanic distribution network. To pilot this project, we reached 3 new partnership agreements to distribute snack wafers, granola clusters and value-added guacamole packages to consumers throughout 6 U.S. cities. Our global plant-based brand, better balance, chose Spain, the U.S. and Mexico to roll out its product offering tailored to each community's local flavors.

These products can be found at 300 establishments that includes restaurants, theme parks, stadiums, music festivals and delivery platforms. Better balance leverages decades of research and development and consumer preference knowledge to deliver its value proposition, focused on taste, texture, nutrition and flexibility.

Moving on, we'll reaffirm our commitment to sustainability, an essential element for the long-term continuation of solid financial results and growth for the company. Because of this, we are including sustainability as a core enabler to advance integration of ESG criteria to everyday decision-making as we evolve the way we think, we work and interact.

As we face certain unexpected headwinds, our teams remains focused and is executing alternative actions to achieve their goals we have set for this year. All hands are on deck. We will continue pushing forward, bringing communities everywhere, favorite foods to love. Thank you.

I will now turn the call back to Eduardo for additional comments and closing remarks.

[Eduardo Alberto Castillo, executive]

Thank you, Roberto. As I mentioned at the beginning, first quarter results have positioned us ahead of our initial 2022 guidance. Based on the outstanding performance year-to-date, an optimistic outlook. Alpek has increased its 2022 EBITDA guidance, 32% to $1.4 billion. Sigma has left its guidance unchanged as the business is supported by solid performances in Mexico, the U.S. and Latin America. Axtel also maintains 2022 guidance subject to potential revisions depending on future market developments.

Taking all this into consideration, Alpek ALFA's 2022 EBITDA guidance was raised to $2.3 billion, 17% higher than the guidance we provided in February. As a reminder, this figure includes $115 million in extraordinary items from Alpek. Comparable ALFA EBITDA guidance increased 11% to $2.2 billion. A better-than-expected outlook reinforces our financial position, which provides a solid foundation to continuous ALFA order in transformational process to mitigate its large conglomerate discount. A quick update on each of the 3 key implementation directives of our unlocking plan are: Starting with reducing leverage. This is an important precondition to achieve the independence of ALFA's subsidiaries.

Strong results coupled with financial discipline have driven significant improvement in financial ratios over the past 2 years. Consolidated net debt to EBITDA of 2.3x represents an improvement of 64 basis points year-over-year. Even though our efforts to accelerate the leverage via strategic alternatives have not materialized in the transaction, we continue seeking options in our shareholders' best interest.

Moving next to strengthen the individual businesses. It is exciting to speak with you each quarter about the multiple actions the businesses have undertaken to boost long-term growth and capture profit opportunities. Roberto covers Sigma. So I will briefly touch on Alpek and Axtel. During the quarter, Alpek announced a transformational acquisition with the purchase of Octal, which will enable the company to forward integrate into the adjacent high-value business of PET sheet and accelerate its ESG agenda.

Alpek expects to close the transaction by the end of the second quarter. Upon closing, Alpek estimates an $85 million EBITDA contribution from Octal during the second half of 2022. It is important to note that this figure is not yet included in the updated guidance for Alpek or ALFA. Axtel is actively engaged in projects to capitalize on attractive market opportunities. For instance, leveraging an unparalleled offering of cloud and cybersecurity services that helps companies transition towards hybrid working environments.

Moreover, the company's mobility project, Alestra Movil is rapidly gaining traction as an attractive service alternative among mobile enterprise customers, who benefit from its intelligent multi-operator connectivity feature. Axtel is also evaluating potential partnerships with interested tariffs in certain parts of this business to accelerate its strategic agenda. In terms of enhancing business independence, Sigma announced an important milestone in this journey to become an independent business with the formation of an advisory board, covered a brief moment ago by Roberto.

At the ALFA level, Paulino Rodríguez, Senior Vice President of Human Capital and Services retired during the first quarter, following a very successful career of almost 2 decades at Sigma and ALFA. Paulino's enthusiasm and dedication in the development of Human Capital leave a long-standing legacy in our culture and values. After Paulino's retirement the corporate functions of Human Capital and finance were merged.

On a final note related to enhancing business independence, First quarter expenses outside of our operating subsidiaries posted a 36% reduction versus 1Q '21. We expect this improvement to continue throughout the year. ALFA held its Annual Shareholders' Meeting last month. During the meeting, the shareholders approved a dividend of $196 million equivalent to $0.04 per share and 5% yield.

Additionally, a share repurchase program for a maximum amount of MXN 5,800 million, or approximately $290 million was approved. This is aligned with our capital allocation strategy based on a disciplined approach to balance deleveraging, investing for growth and returning capital to our shareholders. At the annual meeting, shareholders were also provided with an update on ESG initiatives, an area of high importance for all the companies. Noteworthy, updates included Sigma achieving 3 of its 2025 sustainability goals, several years ahead of plan, and Alpek's increase in installed recycling capacity, reaching 268,000 tons of its 300,000-tonne gold. Additionally, ALFA, Alpek and Axtel recently published their 2021 integrated sustainability reports. Sigma released an executive summary ahead of the extended GRI version to be published shortly. We invite you to review these documents available on each company's website.

In sum, 2022 was another exceptional quarter for ALFA, and I want to thank every ALFA team member for the role in helping us to achieve these very good results.

This concludes my remarks. We are now available to take your questions. Hernan?

[Hernan Lozano, executive]

We would like to begin the Q&A session with questions on ALFA. Eduardo and I will take questions on ALFA or corporate matters. Laura, please instruct participants to queue for questions on ALFA.

[Operator]

[Operator Instructions]

Our first question comes from the line of Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

So about Axtel in the statement you made on the press release about strategic initiatives and partnerships for Axtel. Can you tell us more details on what you are looking for? And what's the update on a potential sale of Axtel?

[Eduardo Alberto Castillo, executive]

Sure, Vanessa. And thank you for your question. Let me begin by saying that we continue looking for ways to eliminate the conglomerate discount in ALFA. And certainly, the monetization of Axtel is and continues to be one alternative. However, in addition to the potential outright sale of Axtel, we have also engaged with interested parties in discussions to evaluate potential partnerships. The idea behind that is since we have been able to -- we have not been able to close a transaction for Axtel, we want to explore the possibility of advancing the strategic agenda of Axtel through these partnerships.

So we are looking at some high value-added services and high market growth segments like cybersecurity and cloud among others, and we are exploring the possibility of doing partnerships with some other companies in order to accelerate our growth into these market segments. We are also continue negotiations regarding Axtel as a whole as well as the infrastructure business unit. We are seeing a positive development in the market regarding the demand for services from our infrastructure unit, in particular, coming from the 5G technology deployment in some of the Mexican mobile operators as well as the buildup of very large data centers, new data centers in Mexico.

So we are confident still that we'll be able to monetize either Axtel as a whole or a large portion of it or do some transactions at some specific high value-added services. Still looking at both options.

[Vanessa Quiroga, analyst]

Okay. Are they exclusive? Are they -- is it one or the other?

[Eduardo Alberto Castillo, executive]

In some cases, we are talking to some interested parties that are looking at both options. In other cases, we do have some companies looking at some very specific services in particular.

[Operator]

Our next question comes from the line of Bernardo Malpica with Compass Group.

[Bernardo Malpica, analyst]

The first one is related to Axtel, also. I mean I know there's a lot going on and all the information you just gave us. But when could we see something a bit more definitive, like when could we get some more clearance in terms of Axtel because everything is a bit of still in the year? And also, the other question I had is regarding Alpek, the spin-off, the possible spin-off of Alpek. Also, when could this come? I mean, could this come only after decision is taken regarding Axtel? Or when could we see something regarding this as well?

[Eduardo Alberto Castillo, executive]

Bernardo, let me -- I'll go into complementing my previous Axtel answer. But let me take this question from the ALFA point of view. And then again, we can go into Axtel. First of all, let me assure you all that we remain fully committed to eliminating the conglomerate discount in ALFA. We think the current level of discount that we have in the prices of our shares is unreasonable considering the fundamental value of our businesses and the very good results that they are achieving.

Having said that, we are taking full advantage of the optionality and time flexibility that we have today coming mainly from the very good results and very strong balance sheets of our companies. As you know, and we reported Alpek today, net leverage is 1.0x, and Sigma is 2.5x. So both companies have ample margins to support ALFA's unlocking value plan.

Having said that, let me again mention that no specific time has been said, nor for ALFA neither for a transaction in Axtel, we feel we do have a space to manage the holding debt maturities, which -- the first important one matures in 2024. So we are looking at different alternatives and our Board will make a decision when they are ready. We plan to continue making consistent progress in the 3 fronts that I mentioned before, reducing leverage with the potential sale of Axtel, but also with other alternatives as the sale of the real estate that we have at the corporate level in Monterrey.

We will also continue working on our core businesses of Octal, the acquisition of Octal is a very good example of that as well as being -- we'll continue working towards achieving business independence from our subsidiaries. And we already mentioned several examples regarding that. So again, Bernardo, no specific time has been set. It is true that the sale process of Axtel has been affected. It has been much longer than what we anticipated earlier on and has been affected by several factors, global uncertainty is an important one of them, but also volatility, changes in the industry and what is going through in our country now have also affected. So we'll continue pursuing it. We'll continue pursuing it, both the outright sale as well as potential partnerships for some services, as I mentioned before.

[Operator]

Our next question comes from the line of Gilberto Garcia with Barclays.

[Gilberto Garcia, analyst]

My question is on Alpek and the potential tax implication, given that the price of Alpek's shares have gone up quite a bit year-to-date. Does that necessarily imply that the eventual tax bill on Alpek spin-off would be higher? Or are there alternatives that would mean that the tax bill is not entirely dependent on the share price at the time when you decide to do it?

[Eduardo Alberto Castillo, executive]

Thank you, Gilberto, for the question. The Alpek's price of the shares could have an implication regarding taxes depending on what we do and when we do it. As you know, the spin-off of any company in Mexico is treated like a sale from the taxes point of view. So the higher the benefit we achieve with this potential sale, if we decide to do something like a spin-off has -- may have tax implications.

The -- in ALFA, we have historically been very conservative regarding our fiscal practices. We really try to make sure and comply with every regulation, both from MAR country as well as any other country where we operate. However, the tax cost will largely depend on how the companies become independent. If it's a spin-off or if we do something different. The -- our idea, as we did with Nemak is we plan to disclose the tax implications when a deal is announced. At this time, again, no path forward has been decided.

[Operator]

Our next question comes from the line of Alejandro Azar with GBM.

[Alejandro Azar Wabi, analyst]

Just a quick one. You mentioned a lot of options regarding the reduction of your leverage on the holding level. My question is, out of all those options is the right financing of the $500 million 2024 bond, is there an option to refinance that bond?

[Eduardo Alberto Castillo, executive]

We are aiming at not doing so at least not fully Alejandro with for the full $500 million. We think we do have flexibility before the bond matures in order to be able to at least not be in a position to refinance it fully. Probably a portion of it may be refinanced either through a new bond or through some other facility, but we are not and we would not like to refinance it, in particular with the new bond.

[Operator]

Our next question comes from the line of Federico Galassi with Rohatyn.

[Federico Galassi, analyst]

Two questions regarding to Axtel to continue with the previous question. The first one is, if you maintain the guidance for this year, in particular, in the revenue side? And the second question is, when I see the debt in U.S. dollars continue to going down lower than in the past, but in terms of net debt to EBITDA is increasing, do you feel comfortable with this level, maybe 2020 was the lowest level of the net debt to EBITDA, but do you still feel comfortable with this growth and this ratio? And the second one is how is the position from the debt side of the company side is if we continue to see a depreciation of the Mexican peso?

[Eduardo Alberto Castillo, executive]

Sure, Federico, and thanks for the questions. Regarding guidance, let me answer you and Adrian de los Santos is also here, and I will turn it over to him in order -- if he has any comments. But let me begin by saying that we decided to, for the time being, maintain the guidance we have for the year for Axtel at the current level, $563 million in sales and $178 million in EBITDA. Since we -- even though the quarter, as we mentioned, had some headwinds, we do expect to have some positive factors going forward. One of them is we see encouraging signs regarding the semiconductor shortage. I think we hope that the worst is behind us, and we are seeing a slightly better supply times by the providers, and that allows Axtel to fulfill the contracts that we have already signed ahead of what the original expectation was.

So that's a very good sign. The development, as I mentioned before, the demand growth regarding 5G and the installation of new data centers in Mexico is also a very positive factor that we are trying to take advantage of as well as what we are doing regarding the new business lines, the reorganization, internal reorganization we did regarding the value-added services.

In addition to those factors, we also have had a negative impact from Altán, the wholesale mobile customer that we have in the first quarter. The concurso mercantil process of Altán has been moving at a very quick pace in the last few weeks. And we expect to have a clear picture going forward for the rest of the year of what the impact of Altán would be for Axtel.

Let me mention that Altán represents 4% -- less than 4% of the revenues of Axtel, but even so it's an important customer that we need to clarify what the outcome of the concurso mercantil is in order to be able to have a better assessment of the impact in the year. Regarding the net debt to EBITDA for Axtel, yes, it is a little bit higher today than it was before. Today, we are at 3.3x. But that has a lot to do, first, with the first quarter, traditionally, we do have an increase in working capital in the first quarter, and you can see that reflected in our numbers. But in addition to that, also to the negative impact we had in the first quarter versus the previous periods. So we do -- we are confident that we'll be able to continue managing the net leverage and will come down the rest of the year. Adrian?

[Adrian de los Santos Escobedo, executive]

Federico, just to complement. Acquisition has been trending up in recent months. So that's positive for revenues in the second -- in the back of the year. So that's something embedded in our guidance in our expected results. So that will increase the expected revenues and EBITDA. And additionally, we have a positive cash flow. We have been generating cash flow. Yes, EBITDA has been affected. Eduardo mentioned the factors. So we have been analyzing. We have no rush to do anything regarding our debt structure or maturity. It's in by the end of 2024. So we have time to decide when it's the right time to do some liability management or to do something regarding our senior notes. Our debt, it's 3/4 in dollars. The rest is in pesos, and we managed to do active hedging mostly on cash flow.

In our interest payments and our CapEx obligations as well. So we are actively trying to mitigate the foreign exchange risk on the current cash flows on the month-to-month cash flows.

[Operator]

Our next question comes from the line of Rodolfo Ramos with Bradesco.

[Rodolfo Ramos, analyst]

Just a follow-up on the previous question on Axtel. Just to understand how this performance that we saw this quarter with infrastructure revenues down almost 20% year-on-year. I mean, how does this affect the sale process? I mean you mentioned in your previous answer about the bankruptcy process expected to conclude this year. I mean does this weakness on whether it is infrastructure or for the whole part for the government side? I mean does this performance impact this timeline on the sale?

[Eduardo Alberto Castillo, executive]

Thanks, Rodolfo. No, we don't think so. We think it is clear what factors are affecting us this first quarter. It's not something that has anything to do with any structural change in Axtel and our position in the market. So again, we do expect results to improve going forward.

[Operator]

Our next question comes from the line of Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

My question is from Sigma. Can I make it right now? Or should I wait?

[Hernan Lozano, executive]

Sure, Vane. We can ask Roberto to answer your question on Sigma.

[Vanessa Quiroga, analyst]

Okay. So about the Advisory Board, congrats on the talented people that you were able to recruit. My question is what's the mission for the Advisory Board and it substitutes the ALFA Board, given the participation of ALFA Board members in the Advisory Board in Sigma. And if -- ultimately, what's expected to happen with regards to Sigma and a potential Sigma for listings?

[Roberto Olivares, executive]

Thank you for your question. Sure. So the mission of the Board is to be a strategic sounding Board that supports the company to achieve its long-term strategy. Not necessarily covering the day-to-day operations, but more the long-term strategy, help us discover and build the future, including the capabilities to get there, and obviously leveraging the knowledge that they have, the different perspectives, the point of views and backgrounds to help us achieve the strategy.

In regards to the governance, as of right now, the company governance remains unchanged. Sigma is wholly-owned by ALFA and hence reports to ALFA's Board of Directors. Eventually, when ALFA's unlocking value strategy continues and when we become an independent company, we might transform this Advisory Board into our Board of Directors.

[Operator]

Our next question comes from the line of Rodolfo Ramos.

[Rodolfo Ramos, analyst]

I don't know if we switch to Sigma, but I have a question on Sigma.

[Hernan Lozano, executive]

Go ahead. We will switch to Sigma next, but you can go ahead.

[Rodolfo Ramos, analyst]

Okay. It's just a -- I wanted to get your take on your expectations for price increases. You increased prices 12% in Mexico. And we have started to hear from the government, these plans to at least institute a pact, we don't know if it's going to be a pact to cap prices or if it will be something more rigid like a cap on certain prices or certain goods. So I just wanted to take -- get your take on this? And what could be the impact on your ability to continue these price increases to offset the input cost pressures?

[Roberto Olivares, executive]

Thank you, Rodolfo. First of all -- maybe give a little bit of context. The -- we participate in an industry that imports most of the raw material from the U.S. and thus is payable in U.S. dollars. So whenever we have a devaluation of the Mexican peso or an increase in cost, the whole industry moves into taking pricing actions. We, in particular, have the capability, not only to take some revenue management initiatives to be able to be more precise when raising prices or giving promotions or discounts, but also we have the reformulation capabilities.

And that give us a little bit of advantage in a sense that we can be able to reformulate their products in order to maintain the preference of our consumers and reduce costs as necessary. I will also mention, Rodolfo, that we have been working since the last 3 years in Mexico in expense-saving initiatives. We have been able to reduce expense in -- even in real terms. And with that, we also have the capability to put less pressure on margins and on price increases in order to maintain margins.

[Rodolfo Ramos, analyst]

These reformulation, I'm assuming you're moving to a smaller presentations?

[Roberto Olivares, executive]

No, not necessarily. Reformulation means, for example, using -- for example, powdered milk instead of fresh milk or the contrary in cases which one is more cost-wise, moving from -- for some particular products that we market that has been pork and poultry moving from turkey to pork, et cetera.

So changing some of the formulation of our products in order to maintain the preference of our consumers and reduce cost.

[Operator]

Okay. I would now turn this call back over to Hernan.

[Hernan Lozano, executive]

Thank you, Laura. We will now take questions on Sigma. Roberto Olivares, Sigma's CFO, will answer your questions. Please prompt for questions on Sigma Laura.

[Operator]

[Operator Instructions]

Our next question comes from the line of Luis Yance from Compass.

[Luis Yance, analyst]

I guess my first question is on Sigma is related to your guidance, the fact that you kept it despite what we saw in the first quarter. So just trying to understand what are the main functions you're making for the remaining 3 quarters to get there, especially in terms of pricing initiatives beyond what you've already done. If you have any initiatives in mind that would be helpful to know. Also on cost does that imply perhaps a pull back in some of the commodity prices relative to what we've seen?

And when I look at first quarter results, you had margin compression year-over-year pretty much across the board. Does that assume a recovering margins in certain regions or not? So if you can help us understand what needs to happen for you from now on to be able to achieve the guidance? That will be my first question.

[Roberto Olivares, executive]

Okay. Thank you, Luis, for your question. So let me start saying that we kick off the year with better-than-expected results in Mexico, the U.S. and Latin America and we remain optimistic for the rest of the year in these regions. In regards to Europe, clearly, the higher costs that resulted from the escalation of the conflict it took a toll on this quarter's results. But as I mentioned, we have already implemented a first phase of price increases in the region that are not fully reflected on the first quarter results. And we have ongoing negotiations to continue implementing a second pricing action phase, and that will be fully executed in the second quarter.

We expect this, Luis, to allow us to close the gap with respect to our budget or our guidance throughout the year. We will continue passing cost increases in case if necessary, as again, these are factors that are impacting the whole industry. So it is natural to expect more pricing actions if cost dynamics continue to rise. I will also highlight that we are working on efficiency and optimization projects to reduce cost and expenses. In some cases, this may include delaying some OpEx for non-essential projects.

However, we acknowledge that the situation is still evolving, and we will continue to monitor it proactively. But as of right now, we do expect to finish within range of our guidance lease.

[Luis Yance, analyst]

Great. And I guess a follow-up on that. Is it fair to assume that the biggest impact from a cost standpoint will happen in the second quarter given that most of the sharp increases and all the issues actually started happening in the second half of the first quarter, and therefore, maybe you still had some inventory at lower prices. And therefore, in the second quarter, we will see the full impact. It might get more than offset by the pricing initiatives that you mentioned. But from a cost standpoint, is that fair to assume?

[Roberto Olivares, executive]

Sorry. I think from a cost standpoint, prices increased since the second half of the first quarter abruptly in all Europe, and they have stay high since in that moment since the first quarter had -- the first half of the first quarter not having those impacts and the second half of those quarters of the same quarter having the impact. You might assume that the second quarter in terms of cost, we will have higher impact. But we will not have the prices that we didn't have in the first quarter. But in the second quarter, we do have the first increase in prices that we did. We are working on the second increase in prices.

As of right now, we already have some countries done the negotiations for the second phase and some of the other will be fully executed by the end of the second quarter. So we will have -- we expect to have less impact on margin than on the first quarter.

[Luis Yance, analyst]

And a lesser impact on margins in the second quarter relative to the first quarter also applies to some of the other regions or just to Europe?

[Roberto Olivares, executive]

So in the case of the Americas, we have not -- as of right now, we have not seen additional -- or cost increases related as of right now to the Russia-Ukraine conflict. We do have, for some particular raw material, higher prices than last year, but those were already reflected before the conflict has started, and we have already implemented price increases, both in the U.S., Mexico and Latin America to offset those cost increases. And with that, we have maintained the margins and we do expect to continue sustaining the margins in the Americas.

[Luis Yance, analyst]

Great. And my last question, and I apologize if you already said that in your prepared remarks, but I wasn't able to connect early. The lower pork meat exports to China. Can you comment on that and whether that's an issue that it's already sold or it could resurface again in the future?

[Roberto Olivares, executive]

Sure. So glad to give you an update on this topic. So since July of last year, we have mounted intense lobbying efforts with the Spanish government through the Ministry of Agriculture and the industry associations for them to directly contact the Chinese authorities and solicit their help in the process of reamalgamation. It is important to mention that this issue must be resolved collectively with the Spanish government as it affects 8 other meat companies in Spain and not only Campofrio Fresco's.

On the operational side, we have completed all the requirements as by the Chinese authorities with regards to the sport protocol, and we are in regular contact with our Chinese distributors to expedite the process from their side. In the meantime, our Fresco team continues to diversify and expand our client base to offset the volume impact. We have more than doubled our sales to other Asian countries like the Philippines and Korea. And we have also developed new markets in Africa as well as started exporting to Mexico.

Apart from this, we have launched initiatives to optimize the byproducts and add value, while finding new markets for this. And lastly, let me just comment that we're implementing cost and expense saving initiatives. For example, we have improved efficiency by concentrating plant operations from 6 to 5 days, to save labor and energy, and we have reduced the external storage expense by optimizing our in-house freezing operations.

With that, I can say that we're working diligently to resolve this situation as soon as possible.

[Luis Yance, analyst]

So should I interpret that, that you still will have some issues in terms of exports to China in the second quarter. Hopefully, in the second half, they may get resolved and in the meantime, you're trying to diversify. Is that fair?

[Roberto Olivares, executive]

That is correct.

[Operator]

Our next question comes from the line of Bernardo Malpica with Compass Group.

[Bernardo Malpica, analyst]

I have a quick question regarding margin in U.S. and results. I mean, I understand that...

[Roberto Olivares, executive]

I cannot hear now if...

[Hernan Lozano, executive]

I think we have lost Bernardo, Roberto.

[Operator]

I would like to turn it back over to you, Hernan for our next set of questions.

[Hernan Lozano, executive]

Well, in case Bernardo comes online, again, please send him through Laura. If not I would like to move forward and take questions on Alpek and Axtel. So from Alpek, we have Jose Carlos Pons, CFO; and from Axtel, we have Eduardo Escalante, Interim CEO; and Adrian de los Santos, CFO, who are available to answer any additional questions. Laura, could you please prompt for questions on Alpek and Axtel?

[Operator]

[Operator Instructions]

Our first question comes from Alejandro Azar with GBM.

[Alejandro Azar Wabi, analyst]

I will move to this side of the question. My question is for Roberto on Sigma and it's a quick one. Just if you could tell us, Roberto, how fast can you increase prices in each region? I mean, I understand that it's harder to increase price at a fast rate in Europe and the U.S. when compared to Mexico and LatAm.

[Roberto Olivares, executive]

Sure, Alejandro, thank you for your question. I think one important thing to consider is the different channels in which we participate in the different regions. In the case of Mexico, one channel that is a little bit faster to take some pricing actions is, for example, the durational channel, where we have a direct sales distribution network that can implement a price increase faster than on a retail chain, thus having those in Mexico make us increase by faster.

In the case of Europe and the U.S., we have been working a lot with -- through the different industry chambers with the relationship that we have with the retailers. In order to expedite the negotiations and take on of pricing actions whenever it's necessary. Usually, as I mentioned, these type of things happen to the whole industry, especially right now, inflation in Europe is happening not only to the meat industry, but to every sector in the shelf. So retailers are feeling the same pressure from all of their suppliers in order to increase prices.

[Operator]

Our next question comes from the line of Bernardo Malpica with Compass Group.

[Bernardo Malpica, analyst]

Sorry, Roberto, my phone got disconnected. So my question was regarding EBITDA margin in Europe, I mean I guess that on a consolidated basis guidance remain the same. But I just want to understand if this comes from a better-than-expected results from other regions? Or because Europe results will come back in the second half, and you will have really good results in Europe?

[Roberto Olivares, executive]

Sure. Thank you, Bernardo. I would say both Bernardo, as of right now results in the other 2 regions are better than expected. And we also expect margin in Europe to recover throughout the year as we start to reflect the price increases that we have already done and continue reflecting the ongoing acquisitions.

[Operator]

Our next question comes from the line of Gilberto Garcia with Barclays.

[Gilberto Garcia, analyst]

My question is on the magnitude of the updated guidance at Alpek. So early in the year, sooner than your traditional update only after the second quarter. Obviously, a lot of moving parts with the energy prices, supply chain issues and so on. And while the update is obviously in the right direction, we argue that it reflects the very limited visibility in the business. Do you think that, that might explain why the market is not reacting to the new guidance at this point?

[Adrian de los Santos Escobedo, executive]

Thank you, Gilberto, for your question. Well, the guidance that we have provided reflects what we believe will happen in the year. As Pepe indicated in the call that we had in the morning, we still believe that the second half of the year could be potentially a little bit better, but we're not ready yet to confirm that the results could be better. But in the end, we're improving our guidance significantly based on the fact that we had a strong first quarter. And we believe that the second quarter will also be strong.

Answering your question why the market is not reacting and the share is not recognizing that is well beyond us. We believe that the valuation is quite attractive. Look at from the performance of the company, look at it from the dividend yield. Well, you know, maybe you can do a better job explaining to your customers this. But in the end, performance is quite strong and well, we've been having the best 2 years in a row on the history of the company.

[Operator]

Our next question comes from the line of Alejandro Chavelas with Credit Suisse.

[Alejandro Chavelas, analyst]

Just 2 simple questions. One is on the first quarter to understand how much of the EBITDA decline was explained by the semiconductor shortage and how much by the one-off charge from Altán to better understand how it could look if semi shortages improve and without the one-off charge?

[José Pons, executive]

Alejandro, as we said in our call, the impact from the semiconductors was approximately MXN 40 million in the first quarter. So that's the revenues impact. On a margin basis, some of it, it's equipment sales, which, on average, have a 20% gross margin, and recurring services have a higher -- significantly higher margins. These were about half and half from each. So that's the effect in margin of contribution.

On the impact from Altán, we don't disclose specifics regarding customers' margins or similar. Additionally, that, as you know, there is a legal process with this customer. So we rather not comment on your question.

[Alejandro Chavelas, analyst]

Very useful. And the second one, you mentioned that changes in the industry have affected the sale or the monetization process and also the results. I just wanted to understand like more broadly, what do you mean by this industry changes? Is it that software-based solutions have taken precedence over VPN or Ethernet, for example, or did you mean on the mobile side, the consolidation that we are seeing in the industry, what are you seeing that was not expected in your industries?

[Eduardo Alberto Castillo, executive]

Alejandro, this is Eduardo. No, what I was referring to was more regarding the global uncertainty and the situation in general with the emerging markets. As we have discussed before, some of the most interested potential companies are for aim investors. And certainly, they look closely at these type of factors that have been affecting their investment process as a whole.

[Alejandro Chavelas, analyst]

Okay. Understood. I just -- if I can push back a little bit Eduardo to better understand. We have seen several transactions in telecom and AT&T LatAm assets. For example, the KKR deal in Colombia, many asset sales in Central America and also in Mexico with the sale of KIO. There have been many transactions. So I do want to understand why this transaction, in particular, was more affected than others?

[Eduardo Alberto Castillo, executive]

I don't know if it was more affected, but certainly, they were able to close those transactions, and we have not, again, we'll continue pursuing it. But I can assure you, some of those buyers have also been working with us, and hopefully, we'll be able to do something with one of them.

[Operator]

Hernan, there are no further questions on this section. I'll turn it back over to you.

[Hernan Lozano, executive]

Thank you, Laura. We do have one last question from our webcast participants and this is for Alpek. This is from Edward Santevecchi with Bradesco. And the question is any update on financing plans for the closing of Octal. Jose Carlos?

[José Pons, executive]

Thank you, Hernan. Well, yes, as we indicated in our conference call, we are very close to closing the transaction. We have received all the relevant authorizations in terms of the trade commissions of each of the relevant countries. So it seems likely that we will close the transaction during May for sure, during the second quarter. And we have secured financing for that transaction. We already are in the final stages of signing that the agreements with the relevant banks. And well, we will have the funds available for the closing of the transaction.

[Hernan Lozano, executive]

Great. So this was our final question. We would like to thank you very much for your interest in ALFA. If you have any additional questions, please feel free to reach out to us. We would be pleased to assist you. We also extend our best wishes to you and your families to stay safe and healthy. Thank you very much for joining us today, and have a great day.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.