Alfa SAB de CV

BMV:ALFAA

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, and welcome to ALFA's Third Quarter 2021 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. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin.

[Hernan Lozano, executive]

Thank you, Alex. Good afternoon, everyone, and welcome to ALFA's Third Quarter 2021 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. These uncertainties include, but are not limited to, ongoing risks related to the impact of COVID-19.

It is my pleasure to participate in today's call together with Eduardo Escalante, ALFA's CFO; Carlos Jimenez, ALFA's Senior VP of Legal and Corporate Affairs; Roberto Olivares, Sigma's CFO; and other 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 are remaining safe and healthy. Third quarter results surpassed our expectations with double-digit top line and EBITDA growth despite the complex operating environment. As a result, annual EBITDA is trending ahead of our previous full year guidance. Importantly, we continue to advance on the 3 key directives that we laid out as part of our unlocking value strategy. Let me begin by sharing a few insights on the latest developments for each of them.

Starting with reducing leverage. 3Q '21 was the third consecutive quarter of sequential leverage reduction. Our net leverage ratio decreased to 2.5x at quarter end, the best level in 3 years. This good performance was mainly driven by Alpek, which reported a low ratio of 1.2x. We are firmly committed to further leverage reduction through strategic initiatives. The Axtel team is actively engaged in negotiations with potential investors as the transaction would be a significant contributor to accelerate the leverage. Unfortunately, we cannot provide further comments at this time given that conversations are ongoing. At the same time, ALFA is evaluating additional alternatives to continue with this orderly transformation process in any scenario.

Next, focus on core businesses. Alpek, Sigma and Axtel continued driving business-specific initiatives that boost their own underlying value while our transformation process is completed. On this matter, I would like to highlight Project Evergreen, implemented by Alpek to enhance its ESG strategy. During the third quarter, the company completed the first phase of this engagement, involving a deeply analytical review that resulted in specific targets for strong material issues as well as the corresponding action plans. For example, in terms of carbon emissions and eco efficiency, Alpek is committed to the Paris Agreement. 27.5% reduction in Scope 1 and 2 emissions by 2030 and carbon neutrality by 2050. We invite you all to review the full set of targets at Alpek's website.

Enhancing business independence is the third derivative. We celebrate the merger of Nemak and Controladora Nemak. For us, this event marks the successful completion of a multistage process that initiated with the announcement of ALFA's unlocking value strategy a little more than 1 year ago. Moreover, ALFA's corporate headcount is down 14% year-to-date. This is primarily driven by the gradual transfer of personnel to our subsidiaries, which is an important part of our efforts to support their service-related independence from ALFA.

On a separate matter related to shareholder value, last quarter, we announced that we successfully expanded the maximum Nafinsa Trust threshold to 75% of ALFA shares outstanding. Based on figures from the fiduciary, foreign investors held 49.3% of outstanding ALFA shares at the close of September 2021. The approved threshold of 75% provides ample room for foreign investors to continue investing in ALFA. Following this announcement, we were happy to see an update issue by FTSE, increasing the number of ALFA shares in its indexes, effective at the close of September 17. We have also been actively engaged with MCSI, providing them with complementary information to restore ALFA's inclusion in their indexes as soon as possible.

Moving next to a brief discussion of the third quarter results. ALFA once again demonstrated its ability to adapt and deliver solid growth. 3Q '21 net sales were $3.97 billion, up 30% year-over-year and 7% quarter-on-quarter. This represented the fifth consecutive quarter of sequential revenue growth. This strong performance was primarily driven by higher average prices at Alpek. Additionally, Sigma reported record revenues, thanks to a better-than-expected recovery in the Foodservice channel and its ability to manage through inflationary pressures.

Consolidated EBITDA increased 11% to $486 million, driven by strong results at Alpek. These good results contributed to a 36% year-over-year increase in accumulated EBITDA to a record $1.5 billion. Adjusting for extraordinary items, primarily noncash inventory gains and carryforward effects at Alpek, comparable EBITDA in the quarter was $440 million, up 21% versus 3Q '20, boosted by a 52% gain at Alpek.

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

[Roberto Olivares, executive]

Thank you, Eduardo, and good afternoon, everyone. On the business update, I will offer an overview of our operational and financial results as well as comments on recent developments related to the profitability improvement plan for our European operations that will take us one step closer to double-digit EBITDA margin in this region.

During the third quarter, Sigma achieved record consolidated revenues of $1.7 billion, 10% above year-over-year, driven by comprehensive revenue management initiatives and meet inflationary cost pressures in the U.S., Mexico and Latin America. The record consolidated revenues were also driven by resilient volumes due to a strong consumer preference for our products and the appreciation of the Mexican peso.

In local currency, revenues were 5% above year-on-year, following high single-digit average price increases in Mexico, the U.S. and Latin America. In Europe, average prices were flat in local currency amid lower pork prices in the region. EBITDA reached $176 million, a 2% decrease year-on-year, mainly due to inflationary pressures in the Americas and a decrease in European pork exports to China. Results were partially offset by a solid operating performance in Mexico and Latin America, where the pricing actions are reflected more quickly. In local currency, consolidated EBITDA decreased 7% when compared to 2020.

Sigma will continue to implement pricing actions to mitigate the impact of higher raw material costs. The time frame of these actions may vary by region and channel and thus, generates temporary margin pressures. As of the end of the third quarter, our pricing actions have allowed us to mitigate most of raw material cost increases. An additional negotiated price increases will be reflected during the fourth quarter.

The Foodservice and convenience channels continued to recover despite a recent surge in COVID-19 cases. Foodservice revenues increased 11% sequentially, 55% year-on-year and only 8% below pre-pandemic levels. Meanwhile, Foodservice EBITDA increased 6% sequentially, has increased 9x year-on-year and is 11% higher versus pre-pandemic levels. The Foodservice margin expansion is the result of successfully implemented tangible cost and expense saving initiatives.

The consolidated EBITDA margin decreased to 10.2% during the quarter. However, year-to-date EBITDA margin as of 3Q '21 reached 10.7%. Throughout 2021, Sigma has faced industry-wide challenges that resulted in a complex operational environment. However, our teams have leveraged the company's global sourcing capabilities to overcome supply chain challenges and have taken data-driven pricing actions aimed to mitigate inflationary pressures. At the same time, we have maintained our focus on building long-term relationships with suppliers, sustaining client service levels and meeting customer demand.

Despite the challenging third quarter, year-to-date revenues and EBITDA are on track with our guidance. Nonetheless, even during challenging times, we remain on the lookout for new opportunities to innovate and continue strengthening our product offering to maintain consumer preference and foster growth. Therefore, I am proud to announce that during the quarter, our growth business unit launched Sigma's first global plant-based brand, Better Balance, which offer healthier and tastier plant-based food options. Better Balance products are currently in a pilot phase in over 90 restaurants in the European, U.S. and Mexican markets.

Finally, I will comment on recent developments regarding our comprehensive plan to improve profitability in the European operations and reach double-digit EBITDA margin in the region. More than 7 years ago, Sigma expanded its operations to Belgium and the Netherlands with the acquisition of Campofrio Food Group. As part of our transformation process to continue enhancing profitability and growth at Sigma and after an exhaustive analysis, we accepted an offer from the Ter BekeGroup to acquire these operations in Belgium and the Netherlands, subject to clearance by competition authorities and local employees consultation rights.

The transaction includes 6 production facilities and 5 brands. As referenced, these operations and brands represented approximately 1% of our consolidated EBITDA in 2020. This decision will consolidate our operations and allow us to focus on our leadership position in the core European markets, where we will continue to offer the nutritious and quality foods that characterize us.

At this time, I would like to take a moment to thank all of our colleagues for their great sense of responsibility and team work. Through times of uncertainty and despite the challenges, their dedication and resilience has made it possible to continue bringing communities everywhere favorite foods to lap. Thank you for your attention. I will now turn the call back to Eduardo for additional comments and closing remarks.

[Eduardo Alberto Castillo, executive]

Thank you, Roberto. To end our prepared remarks, we will provide a brief update on guidance. Alpek continues to be an outstanding performer this year, delivering record EBITDA levels. As a result, the company increased its guidance again, supported by ongoing strong margins. Year-to-date, Sigma and Axtel are in line with previous EBITDA estimates. In turn, ALFA's consolidated 2021 EBITDA guidance increases to $1.937 billion, up 10% from $1.767 billion previously.

Summing up, since mid-2020, we have been driving foundational changes across our business, and we are very pleased with the progress so far towards our financial, operational and strategic goals. This has been a dedicated effort across our entire organization, and I want to thank every ALFA team member for their hard work. We are exiting 2021 on very strong footing and remain firmly committed to continue building sustainable value for our stakeholders.

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

[Hernan Lozano, executive]

Thank you. We would like to begin the Q&A session with questions on ALFA. Eduardo, Carlos and I will take questions on ALFA on corporate matters. Alex, 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]

My question is regarding the corporate expenses that you foresee for 2022. Do you expect to be able to achieve further efficiencies, reductions in corporate expenses independent of what happens with the subsidiary? And I guess if you could give us an update on the process of divesting Axtel or parts of it?

[Eduardo Alberto Castillo, executive]

Sure. Thank you for the questions, Vanessa. Regarding corporate expenses, we think this -- we are going to close this year around probably mid-40s in terms of million dollars. We expect to be at a level similar to last year, probably slightly below, but similar level. But if you compare that with 2019, we would be about 19% below pre-pandemic levels. Of course, some expenses we didn't incur last year since we were working from home. And now we have seen a little increase versus last year in those line items. But overall, we are very happy to be so much below pre-pandemic levels.

And regarding your second question about Axtel, what I can tell you is that conversations continue. We still feel that Infrastructure business unit remains very appealing to investors as they have shown us in this process. And also in the case of the service business unit, opportunities in mobile and digital transformation solutions are also very attractive for them. Certainly, it has been a challenge to be able to close a transaction regarding Axtel has taken us a long time. But we continue pursuing a transaction that allows us -- that would allow us to accomplish the objective of value maximization for our shareholders in Axtel. It is a priority of us. We'll continue working towards that goal. As I mentioned before, we cannot provide you any specific update since we have ongoing negotiations at this time.

[Vanessa Quiroga, analyst]

Great. And great, Eduardo. So just to clarify, for 2022, you expect similar corporate expenses than in 2021, correct?

[Eduardo Alberto Castillo, executive]

We think they are going to be below, Vanessa, we still don't have a number. But since we -- as I mentioned, we have a 14% reduction in terms of personnel that we are transferring to the subsidiaries, we think there's going to be a further reduction from this year.

[Operator]

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

[Rodolfo Ramos, analyst]

My question is on this -- on the farther end of this unlocking value initiative of yours. And just want to get your thoughts on -- obviously, Alpek has been performing very strongly. And I just want to understand how does this strong performance that we've seen so far play out in your minds as to the potential spinning off of this subsidiary and any color on the time line, I mean, considering the tax implications that it could have?

[Eduardo Alberto Castillo, executive]

Sure, Rodolfo. Sure. Thanks for the questions. Let me start by saying that we are -- we continue to be committed to move forward with the strategy that we laid out. Alternatives for the path forward are really subject to determination of the potential Axtel transaction. However, at this time, we feel confident that in addition to the Axtel transaction, we do have several alternatives on the table. Some of them we have discussed before and are very obvious. We have some real estate assets at the corporate level. We have 40 acres of prime real estate in Monterrey and some other nonstrategic assets.

And as you correctly mentioned, the positive results of -- and strong balance sheet at Alpek and I will also add at Sigma, open up several opportunities for ALFA. Alpek being at 1.2x and Sigma being at 2.4x, that allows us flexibility in terms of options, which are being looked and analyzed by our Board of Directors. And they will decide on the best way to proceed in order to make a recommendation to our shareholders. That's where we stand today. We do not have a time line. We do not have a specific time goal to move forward with the process. We will pursue what our Board considers to be the best initiative for our shareholders.

And regarding the tax implications, as you know, we have historically adopted conservative fiscal practices. Today, we do not have a number regarding taxes for any further step like an Alpek spinoff. The impact was really -- would really depend on several factors, like the stock price. The way we do the spinoff, there are different ways to spinoff a company, can be a dividend distribution, can be a capital reduction, et cetera. It would also be affected by the fiscal treatment of other transactions at ALFA. So, when we decide or the Board decides which way to pursue, we will also define the best way to proceed regarding the fiscal front. At this time, we don't have.

[Operator]

[Operator Instructions]

[Hernan Lozano, executive]

In the meantime, Alex, we do have a couple of questions from participants joining us via webcast. Let me read the first one from Declan Hanlon with Santander. What is the current thought process/timing around the eventual separation of Alpek following the Nemak model? And how Alpek may eventually participate in balancing leverage metrics at the pro forma ALFA level? This is a question from Declan.

[Eduardo Alberto Castillo, executive]

Thank you, Declan, for the question. As I mentioned before, we do not have any strict time line to move forward with this. We will do the next steps when it is appropriate and certainly, minimizing any financial risk for what will be remaining in ALFA. Again, the -- how -- I think we have ample room as you mentioned, ample room with Alpek for Alpek to not only, as Pepe mentioned in the previous Alpek call to look at some M&A ways to grow, but also to help us at the ALFA level in order to reduce leverage and move forward with this. Again, we don't have a time or any specific steps. Neither we have a deadline for...

[Hernan Lozano, executive]

That's actually our next question, which comes from Rodrigo Mugaburu with Newfoundland Capital. Is there a deadline for a go or no-go decision on the Axtel sale?

[Eduardo Alberto Castillo, executive]

No, it isn't. There is not. We are, again, pushing as hard as we can in order to close a transaction. And we don't have a deadline. Nevertheless, as I mentioned before, we are looking at other alternatives, and in order to proceed if this continues to take longer than what we expect.

[Hernan Lozano, executive]

Next question comes from Marc Pomper with MEAG. And the question reads, ESG is an increasing investor focus. But oddly, MSCI ESG commentary seems quite dated, still incorporating Nemak in their comments. Are you in active discussions with MSCI ESG? Any sense on MSCI perception?

Thank you for your question, Marc. And we are in contact with MSCI. Hopefully, that information is updated the next time around, the next round of results. Unfortunately, the MSCI platform or the MSCI rating uses -- it's not as other rating processes where you have a back and forth with the rating agency and provide the latest information. But rather they look at publicly available information on a different time basis and drive their conclusions based on that. So yes, short answer to your question, we are in active discussions with them and seeking for that information to be updated as soon as possible.

And that is our last question from the webcast. Alex, do we have any more questions from the line?

[Operator]

We do have a question from Alejandro Azar from GBM.

[Alejandro Azar Wabi, analyst]

Just a quick one on Axtel, if I may. Does the process continues to be focused on -- solely on the Infrastructure sector or the Infrastructure unit? Or could that change to include the whole company?

[Eduardo Alberto Castillo, executive]

Thank you, Alejandro, and thanks for the question. We are looking at both options. We think there is -- as we have discussed before, we think there is value in both. Certainly, the Infrastructure business unit being the largest neutral fiber optic network in Mexico after [indiscernible] is very valuable. But we think the rest of the company, also the services part of it, is also attractive in particular because the streaming and social media consumption is also growing significantly. And we do see an opportunity for expand our services, in particular, in terms of cloud and cybersecurity services. So the investors are looking at both.

[Alejandro Azar Wabi, analyst]

Perfect. And one more, if I may. This is a follow-up on Vanessa. I think the line does increase as well. But on corporate expenses, you mentioned that for 2021, you expect similar to 2020 levels or am I mistaken? You mentioned $50 million or...

[Eduardo Alberto Castillo, executive]

Yes. Let me clarify, and thanks for the opportunity to do so. In 2019, corporate expenses were around $57 million. Last year, the level was around $46 million, okay? So we had -- last year, we already had a reduction of 19% versus 2019. For 2021, we expect to close the year, I would say, around mid-40s, around $45 million to $46 million, so very similar to last year, okay? For next year, we expect to have a further reduction from the $46 million, mainly driven by the transfer of personnel that I discussed before.

[Operator]

Our next question comes from the line of Alfonso Salazar with Scotiabank.

[Alfonso Salazar, analyst]

Yes. The question I have is very general and regarding Axtel. Because it's taking longer than you were expecting at the beginning this divestment, the question I had is how are we incorporating time value of money in the decision-making process? Is there any range of cost of capital that you are using anything that you can help us to understand is part of the decision-making process, which is time value?

[Eduardo Alberto Castillo, executive]

Yes. Thank you, Alfonso. Certainly, timing is very important for us, not only in terms of the Axtel transaction, but as it is obvious also in terms of the restructuring of ALFA. So -- of course, that is an important factor. But really, the challenge to be able to close a good enough transaction for us has been very significant since -- as you correctly mentioned, it has taken much longer than we would like.

[Operator]

Hernan, there are no more audio questions.

[Hernan Lozano, executive]

Thank you, Alex. We do have a couple more webcast questions. And the first one comes from Mario Epelbaum with First NY. In a post-spinoff world, how much of the $40 million in expenses at ALFA do you estimate will have to be absorbed by Sigma?

[Eduardo Alberto Castillo, executive]

Thanks, Mario. That's a tough one because we do not have the -- completed the analysis for each one of the functions that are going to be transferred to Sigma. At the end of the day, what I can tell you is we expect to be able to significantly reduce the overall expenses that we are going to transfer to the -- to each one of the groups. And we think the reduction in corporate functions are going to allow us to have an overall reduction.

[Hernan Lozano, executive]

Let me take the next question which comes from Areli Villeda with INVEX. Congrats on the results. My question comes if you see an impact from the changes in electricity regulation in Mexico and how is the proportion electricity represent of your on a consolidated basis? How much of the electricity comes from self-generation or privates?

I hope I read the -- your question correctly, Areli, but rephrasing a little bit, you want to know about the impact from changes in the electricity regulation and also some more color on the proportion of our electricity coming from private sources versus CFE?

[Eduardo Alberto Castillo, executive]

Sure. Thanks, Areli, for the question. In ALFA, the majority, I would say, 85% to 90% of our electricity consumption is sourced from private suppliers. We do not have significant generation in-house. If you recall, ALFA sold its cogeneration facilities a few years ago. So 100% of our resource is from other private suppliers.

Regarding the deal, what I can tell you is, well, we are following very closely the process in the [Foreign Language] and the Senate. And we will -- depending on the outcome, we will try to adjust to minimize the impact. But for ALFA's costs, certainly, today, as I mentioned, resource from private suppliers, which are affected by this deal.

[Hernan Lozano, executive]

We have one last question from our webcast, and this comes with -- from Jose [indiscernible]. Eduardo mentioned other sources on, one, the corporate land. Have you explored further? Any estimate?

[Eduardo Alberto Castillo, executive]

Thanks for the question. Yes, we do. We have explored different options for the real estate that I referred to. As you can imagine, I'm not in a position to give you a value today since we are looking at ways -- potential ways to monetize the stake. But what I can tell you is significant, I would say, very valuable real estate in San Pedro in Monterrey is 40 acres of, I would say, very prime real estate.

[Hernan Lozano, executive]

Thank you, Eduardo. So it seems that we don't have any questions -- any more questions on the webcast or audio for ALFA or corporate matters. Is that the case, Alex?

[Operator]

Yes, Hernan. There are no further audio questions.

[Hernan Lozano, executive]

Great. In that case, we will then take questions on Sigma. Roberto Olivares, Sigma's CFO, will answer your questions. Operator, please prompt for questions on Sigma.

[Operator]

[Operator Instructions] Our first question comes from the line of Alfonso Salazar with Scotiabank.

[Alfonso Salazar, analyst]

The question that I have is regarding the trend -- different trends in margins in Mexico and in the U.S. Just want to see if you can help us to reconcile what's going on here? And if it's only related to cost pressures? Is there something about pricing, something about the peso appreciation? If you can give us a sense on what's going on here? And also, if you can provide some guidance on what to expect for the fourth quarter in terms of margins and pricing for the fourth quarter and 2022?

[Roberto Olivares, executive]

Thank you, Alfonso, for your question. Regarding the first one, I think -- let me talk briefly about the U.S. and Mexico. U.S., as we stated in the report, has been impacted by a few challenges. However, these are not specific to Sigma, but impacted the whole industry. And by far, the most significant factor has been the raw material cost increase. Just to give you an idea, some of these materials have increased more than 100% during the quarter. And we also have in the case of U.S. some freight, fuel and energy cost increases that impacted us.

And in response to these inflationary pressures, we have taken pricing actions. On average, prices in the U.S. increased by 9% year-on-year. And in this region, it usually takes 2 to 3 months to negotiate prices with retailers. But by the end of September, prices were sufficient to cover about 90% of the impact from higher raw material cost. And as I mentioned in my briefing, additional price increases were already negotiated and will take effect on the fourth quarter.

In the case of Mexico, we have a really strong performance. Volume was up, but we have also record revenues, mainly explained by the pricing actions to mitigate these same inflationary pressures. In the case of Mexico, we have a swift pricing that allow us to improve margin. As you may remember, in Mexico, around 50% of our business come from the traditional channel, where we have the opportunity to reflect the price increases more quickly than in the case of the U.S.

In regards to guidance as of 4Q, by the end of the quarter, we start to see some of the raw material cost to decrease, especially pork that is returning to normal levels. Usually, it takes about 1 month to be reflected in our cost of sales. So we expect to recover some ground on margins by the fourth quarter.

[Operator]

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

[Gilberto Garcia, analyst]

On Mexico, do you -- given the significant relevance of the traditional channel, do you believe that you still have room for price increases in the short term? And on feedstock prices, what are you seeing in terms of pricing pressure into next year considering the current U.S. regulation of the pork industry is likely to trigger incremental pork price inflation?

[Roberto Olivares, executive]

Thank you, Gilberto, for your question. In regards to the question related to Mexico, we still see -- I mean, traditional channel is increasing. Volume was actually up low single digits during the quarter. And we have the capability to increase prices there to reach mid-double digit on sales. We usually have the capability to do that, and we expect to continue doing in case it's necessary. As I mentioned, we do not, as of right now, see more impact on raw material costs that the one we already saw during the third quarter. Pork prices had normalized in the case of the Americas.

In the case for inflation for next year, yes, regulation in the U.S., especially on pork, is increasing, but also a lot of the impact from this year on pork had to do with 3 things. The main one is the recovery of the Foodservice channel and this is something that will normalize eventually, but mostly because of complications on the supply side due to labor shortages that impacted labor, lowered deboning activity. So as COVID phases out, we think that labor shortage will normalize, and we think that with that, the deboning activity will also normalize reducing pressures on cost.

In case of poultry on the other side, we do -- we might expect a little bit of pressure as well probably in the coming quarters because poultry has not normalized yet. Although this year, we have some contracts that hedge a little bit our exposure to this market, those are going to be negotiated for the next year in the next couple of months.

[Operator]

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

[Rodolfo Ramos, analyst]

Just I have one question remaining. How much of your sales are in exports to China and -- for the European operation? And when do you expect this to normalize? And I don't know if you can quantify the impact that you saw during the quarter in there?

[Roberto Olivares, executive]

Sure. Thank you, Rodolfo. Yes. And let me just do a recap for everyone's benefit. We have a Fresco business, which sells fresh pork meat globally. And we had an impact this quarter due to a temporary suspension of a license required to export to China. And the main 2 impacts were related to achievements that were in transit and had to be diverted and the second one related to lower sales volume.

We acted quickly to resolve the issue, and we are currently waiting for a reply from the Chinese authorities. We expect this to resolve, Rodolfo, in the short term. We are, in the meantime, strengthening our markets in Asia as well as other channels. And the goal is to diversify sales and mitigate some of these effects, also increasing, for example, value-added products within Europe that has higher margin. Exports to China represent close to mid-single digits of the whole European business unit. I hope that answers your question, Rodolfo?

[Rodolfo Ramos, analyst]

Yes. And just a follow-up, if I may. Back to the U.S. Are these labor shortages -- are they preventing you -- I mean, besides increasing your cost structure, I mean, are they preventing you for lending product? I mean, are you having trouble getting the products to the shelves? I mean -- or this is mainly more of a financial, more of a cost pressure?

[Roberto Olivares, executive]

Sure. Thank you, Rodolfo. I would say, it's both. And we had some increases in raw materials because our suppliers are running their plants slower and that has increased prices of raw materials. But also, we have had at some moment, during the pandemic this year, we have some issues filling up the positions, the open positions that we have in some of our plants now. This has not -- will -- it has not been a big impact, but we have found to have some issues. And that also is happening, Rodolfo, when you see freight. The amount of drivers that is out there that is willing to take that job is also something that is impacting the cost of freight.

[Operator]

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

[Alejandro Chavelas, analyst]

I think some of my questions have already been answered. But perhaps if you could comment a little bit on where Foodservice sales are versus pre-pandemic in each market that would be super useful? And what are you seeing during the fourth quarter?

[Roberto Olivares, executive]

Thank you, Alejandro. Sure. So we continue seeing a recovery in Foodservice. We have sales very close to pre-pandemic levels, still below. But EBITDA above pre-pandemic levels due mainly to customs and expense-saving initiatives. Let me give you an example of Mexico. Revenues were close to 9% below pre-pandemic levels. But EBITDA is 14% above pre-pandemic levels. And in the case, for example, of Europe, revenues were 8% below and EBITDA was 3x higher than 2019. Although we have seen recent surge during the last month of COVID-19 cases, we have not seen additional impact on this channel. On the contrary, we're looking into a faster-than-expected recovery.

[Operator]

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

[Alejandro Azar Wabi, analyst]

Roberto, just one quick question on free cash flow. Your CapEx seems to be way below your guidance. Are you still expecting to spend $270 million? Or should we postpone some of that to next year?

[Roberto Olivares, executive]

Sure. Thank you, Alejandro. So yes, during the first 9 months, we have invested close to $120 million, which is a slight 2% increase versus last year and the deployment rate of CapEx also increased more than 100% year-on-year. But we have faced some challenges due to COVID. Lead times are a little bit higher. But this has not stopped us and the idea is to continue deploying our CapEx, and we will be within the range of our guidance.

[Alejandro Azar Wabi, analyst]

Excellent. And one more, if I may. Given your strong free cash flow generation, should we expect ITMA to send more dividends to ALFA this year?

[Roberto Olivares, executive]

Sure. So just to comment on 2 things besides the part of dividends. We are already -- a portion of the cash that we have on hand, it has already been assigned to CapEx, as I already mentioned, to continue accelerated in the deployment rate. We also are evaluating investing in some strategic inventories during the winter months when usually prices are on average lower than on the summer months due to seasonality. But yes, we might still see a portion of dividends in the fourth quarter, I would say, to total an amount similar to those that we have been in the previous years.

[Operator]

Hernan, there are no more audio questions.

[Hernan Lozano, executive]

Thank you, Alex. We do have 2 webcast questions, but I believe they were covered with the previous questions. One was related to margins and the other one was related to the Chinese exports. So thank you very much to Bastian from [indiscernible] and Antonio Gomes from Ninety One for your questions.

[Operator]

Thank you, Hernan.

[Hernan Lozano, executive]

Actually, we have one question that has just come up from Jose [indiscernible]. If the Axtel process isn't successful, is Sigma IPO in your alternatives?

[Eduardo Alberto Castillo, executive]

This is Eduardo. Sigma's IPO, as it was in the past, is an alternative. We feel today the markets are not -- in particular in Mexico, are not recognizing the intrinsic value of the companies. So we don't think it is an option in the short term to do an IPO of Sigma in Mexico. But certainly, that would be an alternative if conditions improve.

[Hernan Lozano, executive]

And that was our last webcast question related to Sigma, Alex. No more audio questions. Is that the case?

[Operator]

That is correct.

[Hernan Lozano, executive]

Thank you. So we can now move forward and take questions on Alpek, Axtel and Newpek. From Alpek, we have Jose Carlos Pons, CFO; from Axtel, Eduardo Escalante and Adrian de Los Santos, CEO and CFO, respectively; and from Newpek, Rodolfo Gamboa, Senior Vice President of Oil & Gas. Could you please prompt for questions on Alpek, Axtel or Newpek, Alex?

[Operator]

[Operator Instructions] Our first question comes from the line of Alejandro Chavelas with Crédit Suisse.

[Alejandro Chavelas, analyst]

Just on the -- I listened to the Alpek call, and you obviously mentioned the very strong Asian spreads and Chinese spreads and obviously, a very good performance from polyester this quarter. I was wondering if you could comment a little bit on how our contracts or negotiations on margins for contracted volume looking for, if you can share something positive, it would be great? But it's not -- just some comment on that if you have already undertaken different negotiations with clients, et cetera?

[Hernan Lozano, executive]

José Carlos, I think that question is for you.

[José Pons, executive]

Sure. Thank you, Alejandro. Well, thank you for your question. Yes, certainly, the dynamics for contract negotiations are, I would say, a little bit favorable to Alpek at this moment. Supply demand, specifically in the North American region is short. So there's -- all of our customers are asking us to increase the volume and increase the deliveries for products. And therefore -- I mean, that complementing with the current condition of margins that Pepe said in the call, more or less what we're seeing are far above $350 million on Asian margins. So we do expect that we'll have an important improvement on overall margins going forward to 2022. How much? Well, hopefully, we will be able to tell you in the first quarter call -- I mean, on the call that we will have earlier this next year. But certainly, the dynamics are positive in terms on volume and the dynamic, it's positive in terms of margins and what we're seeing in other markets.

[Alejandro Chavelas, analyst]

Great. Perhaps just as a quick follow-up. Have these contracts and negotiations already taken place? Or are they still ongoing?

[José Pons, executive]

No, they are actually ongoing at this moment. So we have not finalized that. We will end up probably in the first part of December.

[Operator]

Hernan, there are no further audio questions.

[Hernan Lozano, executive]

Thank you very much, Alex. So I think we went through all of the questions. There are no more webcast questions either. I would just like to thank very much for your interest in ALFA. And 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, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.