Alfa SAB de CV

BMV:ALFAA

Earnings Call Analysis

ALFA Reports Robust Earnings and Increases Guidance

ALFA reported better-than-expected results in Q2 2024, driven by strong performances from its key subsidiaries, Sigma and Alpek. Consolidated EBITDA grew by double digits, with Alpek's EBITDA reaching $312 million and Sigma achieving record high quarterly EBITDA, marking its 13th consecutive quarter of revenue growth. Sigma's full-year revenue guidance was raised to $8.85 billion, with EBITDA expected to hit $1 billion, a 9% increase from previous projections. ALFA’s overall EBITDA guidance was also increased by 5% to $1.59 billion, reflecting Sigma's significant contribution of 62% to this guidance .

Solid Financial Performance in Q2

Sigma reported another exceptional quarter, achieving its 13th consecutive quarter of year-on-year revenue growth. The company reached a record EBITDA of $1 billion, driven by strong consumer demand and favorable exchange rate dynamics, particularly the appreciation of the Mexican peso against the U.S. dollar. This performance is underscored by robust sales across all categories in Mexico, the U.S., and Latin America, leading the region to record-high volumes and sales.

Steady Growth Across Regions

The company's performance varied across different regions. In Mexico, Sigma benefitted from consistent growth across all product categories and channels. The U.S. operations thrived due to both Hispanic and mainstream brand contributions. Meanwhile, Europe showed a recovery trend with a notable increase in quarterly EBITDA owing to improvements in the Fresh Meats business and benefits from restructuring initiatives. Continued consumer demand in Latin America also significantly supported growth metrics.

Revised 2024 Forecast and Strategic Initiatives

Encouraged by its performance, Sigma revised its 2024 guidance, projecting full-year revenues of $8.85 billion and EBITDA of $1 billion, representing increases of 2% and 9% over previous estimates, respectively. This forecast assumes an average exchange rate of MXN 18.5 per U.S. dollar for the latter half of the year. The company is also focusing on expanding its plant-based offerings, introducing products like Better-nera and Better Balance to enhance its branded product portfolio.

Alfa's Transformation and Financial Management

ALFA reaffirmed its commitment to its transformation process, largely driven by Sigma's record performance. The consolidated EBITDA guidance for ALFA has increased by 5% to $1.59 billion, while revenues were adjusted up 1% to $16.78 billion, largely due to Sigma's contributions. ALFA is targeting a net debt reduction to approximately $2.5 billion, reflecting its strategic focus on improving financial health and separating Alpek from its portfolio.

Operational Efficiency and Debt Management

Alpek's leverage ratio has improved to 3.3x net debt to EBITDA. The company aims to further decrease this to 2.5x by the end of the year through various measures, such as rationalizing capital expenditures and optimizing dividend payments. ALFA's consolidated net debt, excluding Alpek, stood at $3.25 billion, indicating proactive measures towards achieving healthier leverage and solidifying its financial position for future investments.

Future Outlook and Growth Opportunities

As Sigma prepares for the second half of 2024, it recognizes the challenges stemming from increased raw material costs and foreign exchange volatility but remains confident in its strategies to mitigate these risks. The company has identified opportunities to enhance capacity in key product lines, especially yogurt in Mexico and cheese in the U.S., suggesting potential for increased volumes and margins as demand continues to rise.

Conclusion: Positioned for Continued Growth

Overall, Sigma and ALFA's performance in Q2 reflects a strong operational foundation and strategic agility. Both companies are poised to capitalize on favorable market dynamics while addressing operational challenges. The upward revisions in revenue and EBITDA guidance highlight their commitment to delivering long-term value, making them an appealing slate for potential investors looking for growth potential amidst a transforming landscape.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to ALFA's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. Now I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin.

[Hernan Lozano, executive]

Good day, everyone, and welcome to ALFA's second quarter earnings conference call. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon together with a summarized presentation. Both are available on our website in the Investor Relations section.

Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Eduardo Escalante, ALFA's CFO; and Roberto Olivares, Sigma's CFO.

I will now turn the call over to Eduardo.

[Eduardo Alberto Castillo, executive]

Thank you, Hernan, and good day, everyone. We greatly appreciate your participation. We are pleased to report better-than-expected results once again. Our 2 business units are benefiting from solid execution to boost operation efficiencies, maximize cash flow and capitalize on specific dynamics in their respective markets.

On a consolidated level, this led to double-digit EBITDA growth in the second quarter and first half of the year driven mainly by an outstanding performance at Sigma. For Alpek, it's also encouraging to see a slight sequential improvement in Asian reference Polyester margins as headwinds persist in the global petrochemical industry.

Alpek's accumulated comparable EBITDA of $312 million is on track to reach its full year guidance, supported by resilient demand and cost reduction initiatives. Volume increased 2% in the first half of the year driven by the Polyester segment.

During the second quarter, Alpek also completed its comprehensive plan to capture $75 million in annualized sales. Decisive actions over the past several quarters include footprint optimization, organizational restructuring and improved power supply agreements. Efforts focused on enhancing cost competitiveness will continue.

It is important to note that Alpek's leverage ratio improved to 3.3x at the close of the second quarter driven by higher EBITDA and 5% lower net debt quarter-on-quarter. Reduced CapEx, dividends and optimizations in net working capital contributed towards strong cash flow generation this quarter. Alpek's operational and financial initiatives to mitigate industry headwinds are paying off and keeping the company well positioned to become a standalone entity.

I will now turn the call over to Roberto Olivares, Sigma's CFO, to cover the following section. Please, Roberto?

[Roberto Olivares, executive]

Thank you, Eduardo, and good afternoon, everyone. I am pleased to share an overview of Sigma's exceptional performance this quarter, highlight key regional results, discuss our upward revision for the 2024 guidance and explore exciting updates on various strategic initiatives.

Second Q '24 marked our 13th consecutive quarter of year-on-year revenue growth with Sigma achieving an all-time high quarterly EBITDA. Results reflect solid execution to capitalize on favorable market conditions, including a strong consumer demand and the appreciation of the Mexican peso against the U.S. dollar throughout most of the quarter.

Moving on to regional highlights. Results in Mexico were supported by the consistent growth across all categories and channels alongside a strong peso. In the U.S., our operations were boosted by our Hispanic and mainstream brands.

Similarly, in Latin America, a strong consumer demand in Costa Rica, the Dominican Republic and Ecuador significantly contributed to our performance. In sum, Mexico, the U.S. and Latin America achieved record volume and sales in second Q '24.

Additionally, Europe extended its recovery trend with a significant year-on-year increase in quarterly EBITDA even after adjusting for the onetime expenses from the region's restructuring initiative in second Q '23. This improvement was mainly driven by a better performance in the Fresh Meats business as well as the benefit from the Italy divestments.

Encouraged by our solid performance in the first half of the year, we're excited to announce an upward revision of our 2024 guidance. We now anticipate full year revenues of $8.85 billion and of $1 billion, 2% and 9% higher, respectively, versus our original projections.

Reaching $1 billion EBITDA represented a historic milestone for Sigma, supported by outstanding performance in the Americas and the volume recovery of our European operations. It is also important to note that the new guidance assumes an average exchange rate of MXN 18.5 per U.S. dollar for the second half of 2024.

Shifting to developments in Europe. We are pleased to welcome Juan Ignacio Amat as the new CEO of our European operations. Juan brings over 2 decades of experience in various leadership roles at large European consumer goods companies and a proven track record of successfully implementing transformational plans. We look forward to leveraging Juan Ignacio's leadership and experience to build upon the team's comprehensive efforts to achieve higher profitability in Sigma's second largest region.

Moving on to strategic initiatives. We continue advancing in our growth business unit, actively expanding our offerings in the plant-based category. This includes the launch of Better-nera, a new plant-based whole cut product in Spain and the introduction of our Better Balance plant-based brand in France and Portugal. We are excited by the prospects of enhancing our branded product portfolio with high-potential categories.

On the financial front, our net leverage ratio improved to 2x this quarter, the lowest level in nearly 11 years. During the quarter, we completed the full redemption of our USD 1 billion senior notes due in 2026 primarily with funds from successful issuance of local notes or Certificados Bursátiles.

Liability management actions year-to-date have reinforced Sigma's financial position by extending average debt maturity to 5.7 years at the close of this quarter, up from 2.2 years at the start of 2024. Looking ahead to the second half of the year, we are well prepared to continue leveraging the evolving market conditions. Our foundation is strong, our strategy is sound, and we are poised to continue delivering enduring value to our stakeholders.

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

[Eduardo Alberto Castillo, executive]

Thank you, Roberto. Next, I will provide a brief update on consolidated guidance and ALFA's transformational process. ALFA's guidance was raised to reflect the latest upside from Sigma. Our consolidated EBITDA guidance increased 5% to $1.59 billion, and revenues were adjusted 1% to $16.78 billion.

Let me highlight that Sigma accounts for 62% of the new consolidated guidance. Record EBITDA generation at Sigma magnifies the value opportunity behind the separation of Alpek and provides crucial financial flexibility in the advanced stage of ALFA's transformational process.

More than ever before, there is a large disconnect between Sigma's intrinsic value and its implied value being bundled together with Alpek as ALFA. This massive value opportunity is the biggest incentive for us to accelerate debt reduction and separate Alpek as soon as possible. Lowering debt plays a key role in the orderly process we envision, ensuring that Sigma maintains a strong financial position post separation.

Excluding Alpek, consolidated net debt at the close of 2Q '24 was $3.25 billion. This figure needs to come down closer to our indicative target of $2.5 billion. Among other debt reduction alternatives, various formal sales processes advanced further during the quarter. We will have more to say about this important matter upon reaching binding agreements. In the meantime, we greatly appreciate your understanding and reaffirm our full commitment to finding the best path forward.

Finally, I would like to thank all the ALFA employees, who continue to work tirelessly on driving solid operational results year-to-date and moving forward to complete our transformation process.

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

[Hernan Lozano, executive]

Sure. We would like to begin the Q&A session with questions on ALFA. Eduardo and I will take questions on ALFA or corporate matters. As a reminder, Sigma and Alpek will be available to answer individual questions later in the Q&A session. Operator, please instruct participants to queue on questions for ALFA.

[Operator]

[Operator Instructions] Our first question comes from Juan Ponce of Bradesco.

[Juan Ponce, analyst]

Congrats on the results. We have seen this value-unlocking initiative process move forward. We started off with the Nemak spin-off. And now you're seeing Sigma's stronger performance, guidance is being raised. But the ALFA sum of the parts, discount has continued to widen.

I understand there are certain metrics, certain thresholds that we need to hit for the next step for the Alpek spin-off to materialize. Can you talk a little bit more about the different options you have in terms of the noncore assets that you can sell or divestments of potential business units at Sigma we've heard in the past? So just an update on that would be great.

[Eduardo Alberto Castillo, executive]

Thank you, Juan. Thank you for your question. First of all, let me mention that we continue to be fully committed to completing this process as soon as possible. However, we feel it is important to take the next steps when we make sure that each one of the entities, Alpek outside of ALFA and Sigma as the remaining business within ALFA, maintain a very solid financial position. We don't want to put a heavy burden in any one of the operations.

So that's why we need to reduce the current debt that we have at the holding company. We estimate that together, the debt at the holding plus the debt that Sigma itself holds should be around $2.5 billion. We should be able to bring it down to $2.5 billion in order to approach our target of 2.5x net debt-to-EBITDA.

We think that, that would be the healthy leverage level post separation. We are really surprised of how much value is hidden in -- today in ALFA. ALFA today has a very large discount, we're talking in the order of 50% versus the sum of the parts. Just adding Alpek current market value plus Sigma minus the debt at the holding company, we think, is very significant.

And let me share with you a number that we think is important. If you look at the value -- the current value of Sigma within ALFA, Sigma's implied value within ALFA has an EBITDA multiple of about 5x. If you compare that with the -- with Sigma's peers and comparable multiples of other consumer companies, we think there is significant value that is not being reflected in the ALFA stock price. So again, we feel there is a significant value there.

Regarding the deleveraging question, we are looking at several fronts. We have discussed previously the real estate we have here in the headquarters in Monterrey. We have also discussed the monetization of noncore assets and some other options that we are looking at. And at this time, I do not have a specific timing or advances in those fronts.

What I can tell you is that our time horizon to do this is as soon as possible. We hope to do it in the short term, and we'll provide additional disclosure in due course. It's difficult for us to mention, to talk about specific assets or specific transactions when they are ongoing, and we're in that process.

[Operator]

There are no further questions at this time.

[Hernan Lozano, executive]

Thank you. [Operator Instructions] In the meantime, we can take questions on Sigma. Roberto Olivares, Sigma's CFO, will answer your questions. Operator, could you please prompt for questions on Sigma?

[Operator]

[Operator Instructions] Our first question comes from Lucas Mussi of Morgan Stanley.

[Lucas Mussi, analyst]

I wanted to talk a bit about the U.S., specifically as it pertains to profitability. I think we have seen a different market as it pertains to proteins and their subproducts this year. I just wanted to get your latest thoughts on profitability ahead. We have seen some volatility on pork prices, on the cut-out values. Chicken, we also have seen some strong volatility. So I just want to hear your thoughts on profitability going ahead, especially due to the tougher comps from last year as well.

[Roberto Olivares, executive]

Thank you, Lucas, for your question. We continue to deliver very good results in the U.S., both in volumes and revenue.

[Audio Gap]

on cut-out, but also, I would say on milk, on Class 3 milk, we started to see a little bit of pressure by the end of the quarter. And we've started some revenue management initiatives in order to protect our margins. If you see also in terms of seasonal margin or profitability, usually, this quarter has a little bit less of margin, EBITDA margin because we have higher sales of hot dogs because of the barbecue season. And usually, those products have a little bit less margin than the rest of the products. So it's a little bit seasonal as well.

[Operator]

Our next question comes from Alex Azar of GBM.

[Alejandro Azar Wabi, analyst]

A couple of questions from my side. The first one is on Mexico. Congrats on the margins, on the record margins. But my question on that is if you can tell us a bit about the mix, if you can share with us how much of the $1 billion of that EBITDA comes from the Foodservice? And then if on that -- if on your margins if you are having a mix effect.

And the other one on Mexico is if you are having -- your volume seems also very -- really strong. So if you're having issues on capacity or if you are doing investments on capacity to debottleneck some plants? And if that is -- if we have upside on those margins given how the volumes are right now. Those are my questions on Mexico. I can wait towards the other 2 that I have on my mind.

[Roberto Olivares, executive]

Thank you, Alejandro. Let me first cover the one related to margins and mix effect with Foodservice. Out of the $1 billion guidance that we have for the 2024, I will say particularly Foodservice Mexico accounts for around between 10% of that $1 billion in terms of EBITDA, a little bit close to the 10%.

We are seeing the margins improvement not only in terms of Mexico, not only in the retail but also in Foodservice. We are seeing a better mix in terms of the portfolio of the categories that we have.

Let me give you some example. For example, we're seeing an increased volume in value-added yogurt compares to the core yogurt, and that implies a higher margin for us. So there's still some opportunity that we can capture on that.

In terms of volume and the capacity, I will say we have been working to -- in order to find opportunities to increase our capacity for certain lines. There are some categories that we are close to reach capacity in Mexico. We have the opportunity to try to either use co-packers for some of these categories or -- while we start increasing our capacity.

So we -- as of right now, we're trying to capture as much volume as there is demand in the market for our products. But yes, we're working on some projects to release or add some extra capacity, I would say, in the medium -- in the short to medium term.

And in terms of upside on margins, I would say yes, with extra volume, there's still some capacity. The only thing just to be very cautious about, right now, we're seeing a little bit more extra pressure on certain raw materials and also the FX volatility that right now is in the market given the current macro political environment, we do see a second half with a stronger U.S. dollar that could potentially impact a little bit in margins as in the second half of the year.

[Alejandro Azar Wabi, analyst]

Okay. And my other 2 questions are really simple. If you could remind us with all the restructuring or the reorganization that you're doing in Europe, what are the margins that you are targeting there? If we should see the full potential this year or if that's coming in the next couple of years?

And the other one is on free cash flow. With your new guidance, with $1 billion EBITDA guide, [indiscernible] in CapEx, [ 150 ] in interest, it seems that you're -- you'll be generating close to $300 million, $400 million in free cash flow [indiscernible]. What are your capital allocation priorities on that?

[Roberto Olivares, executive]

So the first one on Europe, let me say we remain fully committed to continue our consistent improvements in the region. We -- as you mentioned, we reached a low point last year in 2023. We are in the process of recovering what we had in -- prior the conflict in Europe, and we expect to reach that level sometime in the following 18 months.

We expect to end up this year with a margin a little bit above or between 4% and 5%. And then in the next years, continue the trend to recover what we have in the past.

In terms of free cash flow and capital allocation, yes, I would say right now, our focus is on deleveraging as to try to help a little bit the corporate strategy at the ALFA level. There could be additional CapEx improve -- or increments in the coming year, particularly due to certain debottleneck projects that we have in some of the regions.

But we usually -- obviously, in terms of capital allocation to prioritize safety, quality of our products, then some CapEx related to -- that have some efficiency or extra volume that help us capture more value and then any other use of proceeds ALFA needs.

[Operator]

There are no further questions at this time.

[Hernan Lozano, executive]

Thank you. We do have one question through our Q&A chat, which relates to capacity utilization. If you could share, Roberto, the current plans to increase capacity in any of the regions and where you see utilization rates increasing within the next few years.

[Roberto Olivares, executive]

Thank you. So let me talk region by region. Let me start with the U.S. In the U.S., we are -- we continue advancing in increasing our capacity. In the case of processed meat, last year, we acquired a plant in Iowa that help us increase our capacity. There's still some additional phases that we have been adding into that original capacity that we had for Iowa.

Actually during the second quarter of this year, we had an extra line to that plant, freeing up or giving us more capacity of sliced luncheon meat for that plant. And there's still extra room in that plant to add more lines in cases if necessary, and that will increase capacity with not that much investment.

And then in case of cheese, we also add an extra vat in our Los Altos plant in California to add a little more capacity. We still need more capacity at that plant, given the volume that we have. Recently, we're working on a plant, in general, a master plant in the U.S. in cheese to increase capacity between our California and our Northeast plant in the U.S.

In case of Mexico, we were working on a project to increase capacity in yogurt. There's some opportunity or there's some demand for our yogurt products in the market. So we -- in the next short to medium term, we'll need to increase our capacity in yogurt.

And also in certain of our processing categories depending on the type of product, there's opportunities to also -- to increase capacity. In the case of -- in general, we're also working on the other side of Europe to -- in projects to increase our capacity utilization in some of the plants, either through extra volume or also to try to rightsize or optimize some of the footprint in order to have some efficiencies in our operations.

[Hernan Lozano, executive]

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

[Operator]

[Operator Instructions] There are no further questions at this time.

[Hernan Lozano, executive]

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

[José Pons, executive]

Thank you, Francois. Thank you for your question. I'll start by saying that, first of all, margins have already incorporated the situation in China. So we're seeing Polyester margins at a lower level than historical performance. They recovered a little bit since the summer of last year and gradually are getting into the direction that -- it was incorporated into our guidance.

In terms of second topic, our guidance already considers low levels of margins. And therefore, it doesn't feel or it doesn't seem to be an issue for meeting our guidance expectations.

Now also, we've seen many of the countries in which we participate already moving towards fair trade. What do I mean by fair trade? That means they're imposing duties or antidumping measures to protect against nonfair -- nonmarket fair practices.

For example, U.S. has an antidumping that takes the duty above 100%. Mexico implemented a duty that it takes imports from China around 35%. And there's also a measure or a study that the government is doing to put in place an antidumping in Mexico. And the other markets in which we participate have already implemented similar measures to protect.

The other thing that you need to consider or needs to be considered are the current situation in logistics. As you've seen, there's an interruption or a change in the logistics times and costs because of the Red Sea condition. And that also protects against Chinese unfair imports.

And then what you're starting to see in the Chinese market is a portion of rationalization of capacity and less buildup of new capacity. So we believe that, that's also a condition that might gradually take to a more sustainable condition in the market.

So in short, we don't see a big risk on margins to the level that they are today because there are certain conditions that will protect us to what we're seeing. And that could even take them to a better level.

[Hernan Lozano, executive]

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

[José Pons, executive]

Yes. We closed the second quarter at 3.3x net debt to EBITDA that it's completely in line to our expectations, and we are targeting to end the year close to 2.5x. We are doing extraordinary measures to protect our balance sheet with improved working capital in the quarter.

We rationalized CapEx, and we expect to end the year below our initial guidance of $200 million. We also proposed not to pay a dividend this year, and that was approved. So that's certainly a measure that will help us protect the balance sheet and end the year close or hopefully at 2.5x net debt to EBITDA.

[Hernan Lozano, executive]

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

[Operator]

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