ALFA has reported a strong performance in the second quarter of 2024, surpassing expectations with significant EBITDA growth, primarily attributed to Sigma’s exceptional results. The company has revised its full-year guidance upwards, now expecting revenues of $8.85 billion and EBITDA of $1.0 billion.
Sigma, a division of ALFA, reached a record high quarterly EBITDA, with growth in all categories and regions. Alpek, another division, also saw improvements and completed a plan to save $75 million annually. With a focus on debt reduction and the separation of Alpek, ALFA aims to enhance shareholder value.
Key Takeaways
- ALFA’s second-quarter performance exceeded expectations with double-digit EBITDA growth.
- Sigma division achieved record EBITDA, with strong growth in Mexico, the US, and Latin America.
- Alpek division completed a savings plan and saw a slight increase in Asian polyester margins.
- ALFA revised its 2024 full-year guidance to $8.85 billion in revenues and $1.0 billion in EBITDA.
- The company’s net leverage ratio improved significantly, and it fully redeemed its $1 billion US dollar Senior Notes.
Company Outlook
- ALFA has raised its 2024 revenue and EBITDA outlook.
- Sigma’s strong performance is expected to continue, with a focus on increasing capacity and improving product mix.
- Alpek has incorporated the current low polyester margins into its guidance.
Bearish Highlights
- Sigma faced pressure on raw materials costs in the US, prompting revenue management initiatives to maintain margins.
- Alpek’s CFO acknowledged risks to polyester margins due to weak demand in China but remains confident in meeting the company’s financial targets.
Bullish Highlights
- Sigma reported record volumes and revenues in the US and Mexico.
- Alpek’s comprehensive savings plan is set to capture $75 million in annualized savings.
- Anti-dumping measures in the US and Mexico may support margins by protecting against unfair competition.
Misses
- No specific misses were highlighted in the earnings call summary provided.
Q&A Highlights
- Sigma’s CFO discussed plans for capacity increases and product category improvements.
- Alpek’s CFO addressed concerns about China’s weak consumption, stating that the situation has been factored into their margins and guidance.
- Both divisions are prioritizing balance sheet protection with measures such as improving working capital and rationalizing capital expenditures. Alpek will not pay dividends this year to further this goal.
ALFA (ticker not provided), with its divisions Sigma and Alpek, is demonstrating resilience and strategic focus amid market challenges. The company’s proactive measures to manage costs, improve margins, and reduce debt are foundational to its revised and optimistic outlook for 2024. As ALFA continues to navigate global market conditions, its commitment to unlocking value and strengthening its financial position is clear.
Full transcript – None (ALFFF) Q2 2024:
Operator: Good day and welcome to ALFA’s First 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: 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 Escalante: Thank you, Hernán and good day everyone. We greatly appreciate your participation. We are pleased to report better-than-expected results once again. Our two business units are benefitting from solid execution to boost operating 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 was 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 dollars 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 dollars in annualized savings. Decisive actions over the past several quarters included 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 3.3 times 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 stand-alone entity. I will now turn the call over to Roberto Olivares, Sigma’s CFO, to cover the following section. Please, Roberto.
Roberto Olivares: Thank you, Eduardo, and good afternoon, everyone. I’m 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. 2Q ‘24 marked our thirteenth 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 strong consumer demand and the appreciation of the Mexican peso against the US dollar throughout most of the quarter. Moving on to regional highlights, results in Mexico were supported by consistent growth across all categories and channels, alongside a strong peso. In the US, our operations were boosted by our Hispanic and Mainstream Brands. Similarly, in Latam, strong consumer demand in Costa Rica, the Dominican Republic and Ecuador significantly contributed to our performance. In sum, Mexico, the U.S. and Latam achieved record volume and sales in 2Q ‘24. Additionally, Europe extended its recovery trend with a significant year-on-year increase in quarterly EBITDA, even after adjusting for the one-time expenses from the region’s restructuring initiative in 2Q ‘23. This improvement was mainly driven by a better performance in the Fresh Meats business as well as the benefits from the Italy divestment. Encouraged by our solid performance in the first half of the year, we are excited to announce an upward revision of our 2024 guidance. We now anticipate full-year revenues of $8.85 billion and EBITDA of $1.0 billion, 2% and 9% higher, respectively, versus our original projections. Reaching $1.0 billion EBITDA represents a historic milestone for Sigma, supported by outstanding performance in the Americas and the ongoing recovery of our European operations. It is also important to note that the new guidance assumes an average exchange rate of 18.5 Pesos per US 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 two 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 2 times this quarter, the lowest level in nearly 11 years. During the quarter, we completed the full redemption of our $1 billion US dollar Senior Notes due in 2026, primarily with funds from successful issuances of local notes, or Certificados Bursatiles. 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 hand over the call to Eduardo for his additional comments and closing remarks.
Eduardo Escalante: 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 up 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 sale 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. 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.
Hernan Lozano: We would like to begin the Q&A session with questions on Alpha. Eduardo and I will take questions on Alpha 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 one question for Alpha.
Operator: [Operator Instructions] Our first question comes from [inaudible]
Unidentified Analyst: Hi, Eduardo and Hernan. And thanks for taking my question and 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 Alpha some of the parts discount has continued to widen. I understand there’s certain metrics, certain thresholds that we need to hold for the next step for the Alpha 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. Thank you very much.
Eduardo Escalante: Thank you for your question. A, 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 step when we make sure that each one of the entities, Alpek, outside of Alpha and Sigma as the remaining business within Alpha, it maintains 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 would be a healthy, leverage level post separation. We are really surprised of how much value is hidden in today in Alpha. Alpha today has a very large discount. We’re talking about the order of 50% versus the sum of the parts. Just adding Alpek current market value plus Sigma minus the data, the holding company. We think it’s 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 Alpha, Sigma’s implied value within Alpha has an EBITDA multiple of about 5x. If you compare that with Sigma’s peers and comparable multiples of other consumer companies, within their significant value that is not being reflected in the Alpha stock price. So again, we feel there is a significant value there. Regarding the leverage in question, we are looking at several fronts. We have discussed previously the real estate we have here in the headquarters in Monterey. We have also discussed the monetization of noncore assets and some other options that we’re looking at. At this time, I do not have a specific timing or advances in those fronts. But what I can tell you is that our time for right 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 is 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: Thank you. There’s, let me just remind you that there’s also the option to ask your questions through the Q&A check. So that’s also available. 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 Muzzi of Morgan Stanley.
Unidentified Analyst: Hi, Roberto. Thanks for taking my question. I wanted to talk a bit about the US specifically as it pertains to profitability. I think we have seen a different market as it pertains to proteins and their sub products this year. I just wanted to get your latest thoughts on profitability ahead. We have seen some volatility on pork prices on the cutout values. Chicken, we also have seen some strong volatility. So I just want to hear thoughts on profitability going ahead, especially due to the different comps from last year as well. Thanks.
Roberto Olivares: Thank you, Lucas, for your question. And we continue to deliver very good results in the US both in volumes and revenues. We have record volume and record revenues in the US. In terms of profitability, yes, the second part was to see some pressures, particularly in raw materials. You mentioned pork handling or the cutout. 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 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.
Alex Azar: Hi, Roberto. Good morning. 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 EBITDA comes from the food service. 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 the bottleneck 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 for the other two that I have on my mind.
Roberto Olivares: Thank you, Alejandro. Let me first over the one related to margins and the mix effect with food service. Out of the $1 billion guidance that we have for the 2024, I will say particularly a food service Mexico accounts for around 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 food service. We are seeing a better mix in terms of the portfolio of the categories that we have. Let me give you some examples. For example, we’re seeing an increased volume in value added yogurt compared to the core yogurt and that implies a higher margin for us. So there’s still some opportunities that we can capture on that. In terms of volume and the capacity, I would say we have been working 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 and to try to either use co-packers for some of these categories or while we are 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 product. Well, yes, we’re working on some projects to do release or add some extra capacity. I would say in the medium, in short to medium. And in terms of upside on margins and I would say yes with extra volume there’s still some chunk capacity, the only thing and 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 micro-political environment. We do see a second half with a stronger US dollar that could potentially impact a little bit in margins as in the second half of the year.
Alex Azar: Okay Thank you, Roberto. And my other two questions are really simple. If you could remind us with all the restructuring of 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 EBITDA by around 3.1 [inaudible] 150, in interest, it seems that you will be generating close to $300 million -$400 million in free cash flow, what would be, what are your capital allocation priorities?
Roberto Olivares: So the first one on Europe, let me say we remain fully committed to continue our consistent improvement 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 prior to 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 between 4% and 5%. And then, during 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 to try to help a little bit the corporate strategy at the Alpha level. There could be additional CapEx improvements in the coming years, particularly due to certain development projects that we have in some of the regions. But we usually try 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 procedural needs.
Operator: There are no further questions at this time.
Hernan Lozano: Thank you. We do have one question through our Q&A chat which relates to capacity utilization. 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: Thank you. So let me talk to you about the region. Let me start with the US. In the US, we continue advancing in increasing our capacity. In the case of process meat, last year we acquired a plant in Iowa that helped us increase our capacity. There are still some additional phases that we have been adding into that original capacity that we had co-hire actually during the second part of this year, we had an extra line to that plant freeing up or giving us more capacity of the slices, launch 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 investments. And then in case of the cheese, we also add an extra bat in our Los Altos plant in California to add a little bit more of capacity. We still need more capacity that plant given the volume that we have recently. We’re working on a plant in general, a master plant in the US in cheese to increase capacity between our California and our Northeast plant in the US. In case of Mexico, we were working on a project to increase capacity in yogurt. There’s some opportunity or there’s strong demand for our yogurt products in the market. So we wait in the next short and medium, 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 increase capacity. In the case of, in general, we’re also working on the other side of Europe in projects to increase our capacity utilization in some of the plants, either through extra volume or also to try to the rightsize or optimize some of the footprint in order to have some efficiencies in our operations.
Hernan Lozano: 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 Jose 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: 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, if there is an oversupply problem similar to the one, we’re facing across other industries?
Eduardo Escalante: Thank you, Alfonso. 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 the lower level than historical performance. They’ve been recovered a little bit since the summer of last year and gradually are getting into the direction that it was incorporated into our guidance. That’s the second topic. Our guidance already considers low levels of margins, and therefore 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 anti-dumping measures to protect against non-fair, non-market fair practices. For example, the U.S. has an anti-dumping that takes the duty above 100%, Mexico implemented a duty that takes imports from China around 35%, and there’s also a measure or a study that the government’s doing to put in place an anti-dumping 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 and logistics, as you’ve seen, there’s an interruption or 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 on capacity and less buildup of new capacity. So we believe that’s also a condition that might gradually take to a more sustainable condition in the market. So in short, we don’t see 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: Thank you, Eduardo. We do have another question. And this is, could you walk us through Alpek’s leverage expectations?
Eduardo Escalante: Yes, we close the second quarter on a 3.3x net debt to EBITDA. It’s completely aligned 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 rationalize CapEx and we expect to end the year below our initial guidance of $200 million. We also propose not to pay a dividend this year 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: 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 Alpha. 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. Thank you.
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