Earnings call: ALFA boasts robust Q1 growth, eyes debt reduction

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Earnings call: ALFA boasts robust Q1 growth, eyes debt reduction
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ALFA has reported a strong start to 2024 with significant growth in EBITDA and increased volumes across its business units. Alpek, ALFA's polyester segment, experienced volume growth due to PTA exports and heightened demand. The company has nearly reached its cost efficiency goal, having achieved 80% of its planned $75 million in annual savings.

Sigma, another business unit of ALFA, recorded its highest quarterly volume and revenue, supported by growth in all categories and channels, and a notable 50% YoY EBITDA increase in its European operations. ALFA is also progressing in its strategy to lower its net leverage ratio and reduce aggregate net debt, while adjusting its capital allocation to prioritize cash flow and debt reduction. The timeline for the completion of ALFA's restructuring remains uncertain, but the company is dedicated to expediting the process.

Key Takeaways

  • ALFA reports strong Q1 with double-digit EBITDA growth and higher volumes in both Alpek and Sigma units.
  • Alpek nears its cost-saving target with 80% of the $75 million goal achieved.
  • Sigma achieves record quarterly volumes and revenues, with a significant EBITDA increase in Europe.
  • ALFA aims to reduce net leverage ratio to 2.5x and net debt to about $2.5 billion.
  • Dividends have been reduced to $48 million, and buybacks suspended to support debt reduction.
  • The company is working on divestitures and capital allocation initiatives to reduce holding company debt.
  • Positive consumer environment in Mexico aids Sigma's growth in processed meat, cheese, and yogurt sectors.

Company Outlook

  • ALFA is focused on reducing debt through asset monetization and cost-saving measures.
  • The company is adapting its strategies to complete restructuring promptly.
  • Sigma anticipates receiving dividends and contributing to ALFA's debt reduction efforts.

Bearish Highlights

  • The timeline for asset monetization and restructuring completion is uncertain.
  • ALFA faces potential cost pressures from labor regulation reforms in Mexico.

Bullish Highlights

  • Alpek has successfully implemented a cost efficiency plan, achieving significant savings.
  • Sigma's European operations have shown robust recovery, contributing to overall growth.

Misses

  • ALFA has suspended share buybacks and reduced dividends as part of its debt reduction strategy.

Q&A Highlights

  • Executives highlighted the focus on reducing holding company debt and achieving a net leverage target of 2.5x.
  • The positive consumer environment in Mexico is driving volume growth for Sigma.
  • ALFA is mitigating increased costs due to labor regulation reforms in Mexico by finding efficiencies and optimizing production plans.

Full transcript - None (ALFFF) Q1 2024:

Operator: Good day everyone 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 first 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, Hernan, and hello, everyone. We are delighted to see these year a start on the strong footing, highlighted by the double-digit growth of ALFA's first quarter EBITDA and both of our business units reporting higher volumes. Beginning with Alpek. Volume growth was mainly driven by the Polyester segment, which benefited from incremental PTA exports and its live demand improvement. In the face of expected market challenges, Alpek 1Q '24 comparable EBITDA of $154 million is tracking in line with this full year guidance. Since early 2023, Alpek has been implementing a comprehensive plan to deliver over $75 million in annual savings as it navigates industry headwinds. The company has achieved most of its targeted cost efficiencies, capturing approximately 80% to date, which is ahead of plan. Additionally, Alpek continues to see a slight sequential improvement in Asian reference polyester margins supported by early signs of capacity rationalization. Alpek is prioritizing free cash flow generation. Capital location has been adjusted to lower CapEx versus the prior year and temporarily hold dividends to its shareholders. The year-to-date increase in net debt was due to investment in net working capital as feedstock prices and volume rose. The company is closely following the evolution of its net debt and remains fully committed to reducing its net leverage ratio of 3.7x towards [ph] 2.5x by year-end. I will now turn the call over to Roberto Olivares, Sigma CFO, to let him discuss the company's first quarter and progress on the strategic initiatives. Please, Roberto.

Roberto Olivares: Thank you, Eduardo, and good afternoon, everyone. We have started the year with a strong operational momentum, while capitalizing variable market conditions which I will detail in today’s discussion. We will explore our quarterly results as well as delve into operational highlights, share exciting news from our growth business unit through Tastech and discuss our ongoing liability management strategies. We have reached an all-time high in quarterly consolidated EBITDA. This quarter also marks the 12th consecutive 3-month period of year-on-year revenue growth, driven by record first quarter volumes. We are maintaining our EBITDA guidance, while we assess the potential for an upward revision, considering our continued confidence in operational excellence, as well as evolving economic and market conditions. Shifting to regional highlights. Our operations in Mexico reached record quarterly volume and revenue amounts, driven by consistent growth across all categories and channels. These results alongside a strong peso, culminated in the highest first quarter EBITDA ever for the region. The U.S operations were boosted by our Hispanic and Mainstream brands, while the LatAm operations were driven by Central America, enabling us to reach a record first quarter volume, and an all-time high quarterly EBITDA in both regions. And lastly, our European operations continue their trajectory of recovery with EBITDA growing more than 50% year-on-year. This was primarily due to the improvements in the fresh meat business, as well as the benefit following our divestments in Italy. One of our strategic goals is to diversify and strengthen our market presence. This is reflected in our brand portfolio, which now exceeds 100 brands and continues to develop into a more robust and diverse selection. Notably, three of our dairy brands, La Chona, Los Altos from the U.S., plus Nochebuena from Mexico, each surpass annual sales of $100 million, increasing their total number of brands reaching this important milestone to [technical difficulty]. This accomplishment demonstrates our ability to build and maintain brands that fulfill our consumer needs. Moving on to our growth business units. During this quarter, we launched the 5th edition of Tastech, our Open Innovation program that deepens our engagement with the global startup ecosystem. This year, Tastech included new areas focused on advancements of the industry, innovative business models, and artificial intelligence. This initiative is designed to leverage a state-of-the-art technologies and emerging trends to enhance our operational efficiency and value proposition. Previous Tastech editions attracted [ph] over 1,300 applications from startups in more than 50 countries, resulting in qualified pilot tests. We deeply value the optionality that Tastech provides through systematic exploration of disruptive technologies and new business models, beyond Sigma's traditional domain. In terms of liability management, at the end of 1Q '24, our net leverage ratio has stood at 2.2x, the lowest level in the last 10 years, thus reflecting our disciplined approach to financial management. During this quarter, we settled our 600 million Euro Senior Notes due in 2024 using funds from four bilateral, long-term bank loans. Additionally, we carry out the successful placement of close to $600 million in local notes, Certificados Bursátiles, which were oversubscribed by nearly 2.7x. These transactions have strengthened our financial position by extending our average debt maturity to 4.6 from 3.1 years. The proceeds will be used to refinance a significant portion of the senior notes that are due in 2026. A partial redemption has already been publicly announced. Currently, we're preparing for another issuance of local notes under the same program that will take place during the second quarter of 2024, aiming to further extend our debt maturity profile by refinancing our current debt. As moving forward, we do so with great optimism for the future. The achievements of this quarter are stepping stones to greater success. We're committed to continuing our journey of sustainable growth and innovation, creating value for all stakeholders. I will now turn the call back to Eduardo, for regional comments and closing remarks.

Eduardo Escalante: Thank you, Roberto. Sigma's outstanding EBITDA generation is a key pillar in the final phase of ALFA's transformation. It is encouraging to see trailing 12-month EBITDA reach a record $965 million, supported by robust volume growth. To implement the planned separation of Alpek, we must also reduce a significant amount of debt at the remaining entities. ALFA's consolidated net debt at the close of the first quarter was $5.1 billion, which includes net debt outside of Alpek totaling $3.3 billion. This number fluctuates from quarter-to-quarter as part of our ordinary course of business. Yet the orderly process we envision requires the aggregate net debt outside of Alpek to come down closer to $2.5 billion to ensure a healthy leverage post separation. Various formal sale processes are advancing as we step up our efforts to reach the desired financial conditions. Additional information about potential transactions would be disclosed when we reach binding agreements. We greatly appreciate your understanding in the meantime, and [indiscernible] full commitment to finding the best path forward. Our Annual Shareholder meeting was held on March 6. Shareholders approved the cash dividend of $0.48 million, which is lower than prior years. On the corporate governance front, shareholders confirmed the designation of Alvaro Fernandez as Chairman of the Board and appointed Alejandra Palacios as Independent Board Member with her mandate starting on May 15. We look forward to Alejandra taking on her new role as she enhances ALFA's Board composition in terms of expertise, independence and gender. Before opening the call for questions, let me mention that ALFA and Alpek have each published their 2023 Annual and Sustainability Reports, which can be found on their websites. 2024 is a very special year for ALFA as we celebrate its 50th anniversary. We are proud of our half century heritage and the enduring direction it offers for independent businesses to continue building their own history and enriching the ALFA legacy. This concludes my remarks. We are now available to take your questions. Please Hernan.

Hernan Lozano: 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 for questions on ALFA.

Operator: [Operator Instructions] Our first question comes from Rodolfo Ramos of Bradesco. Please sir, go ahead.

Rodolfo Ramos: Good afternoon. Thank you for taking my question. My question is a little bit on the monetization of non-core assets. If you can tell us a little bit of perhaps on the timeline that you're looking at is this could this be you know, this final step in the unlocking value initiatives, could this be something that we see this year, and in terms of assets that you're looking at, I don't know if there's anything across, something that these assets have in common in terms of geography, business lines, or any more detail than we could have there. Thank you.

Eduardo Escalante: Thank you. Thank you Rodolfo for the questions. It is difficult to set up a timeline for the monetization of assets, since we do not have a full control of the process. I mean we're pushing as much as we can do more to be able to do monetize the some different assets in the different companies. But again, this is difficult to commit to a timeline. We are actively -- actively seeking, as I mentioned before, to accelerate the debt reduction at the holding company. And in addition to the monetization of non-core assets, among which I can mention the real estate we have here at headquarters as well as some noncore parts of the businesses, I don't think it's appropriate to go into specific regions or specific operations, other than say that we did a extensive review of the portfolio and decided which assets to take a look in this process. But I have to say that in addition to that, we also -- we are also have been taking actions, and you have seen those in terms of do capital allocation initiatives more focused on reducing the data of the holding company. We will reduce -- ALFA reduce the dividends we paid this year to $48 million from much higher numbers in the past 2 years. We have suspended for the time being, the buybacks. The companies are reducing their CapEx and putting a lot of emphasis into their cash flow. So we'll continue working towards reducing the debt. Other than that, it's hard to me to point out some specific issues.

Rodolfo Ramos: Thank you.

Eduardo Escalante: You’re welcome.

Operator: Our next question comes from Andres Cardona of Citi. Please, sir, go ahead.

Andres Cardona: Hi, good morning, Eduardo, Hernan. Yes, just one quick question. Very interesting. You provide a guidance about the size of the divestiture targeting $2.5 billion, you said you need to reduce the net leverage by $100 million. I was wondering if this guidance is based on the -- again, guidance that you provide for the EBITDA for 2024? Or does it take into account last 12 months operational results of the different subsidiaries?

Eduardo Escalante: It does take into account the operational results. And thanks, Andres, for bringing that up. The way it is calculated, it is, as I mentioned, we need to combine debt of ALFA and Sigma to be close to $2.5 billion, and that number comes from having to being close to the target of the combined entity to have it at 2.5x net leverage, which, if we consider a round number of $1 billion for Sigma's EBITDA, going forward, we think we have to be around that. Considering that today’s combined debt of Sigma and ALFA are 3.3, you are right. We need to reduce in the order of $0.8 billion, $0.7 billion, including everything we are doing. We are going to receive dividend from Sigma this year and hopefully we will be able to reduce our debt at the holding company starting this year. And then coming from -- with funds coming from the monetization of assets, hopefully we can do something this year. I’m not sure we are going to be able to achieve that much this year as I mentioned before, but certainly that is the goal to leave the combined entity with very strong financial position around 2.5x.

Andres Cardona: Thank you, Eduardo.

Eduardo Escalante: You’re welcome.

Operator: Our next question comes from Alfonso Salazar of Scotiabank. Please sir, go ahead.

Alfonso Salazar:

Hernan Lozano: Hello, Alfonso, this is Hernan. I think your mic is on mute.

Alfonso Salazar: Yes. Can you hear me now?

Hernan Lozano: Yes. Perfect. Hello.

Alfonso Salazar: Thank you. So the question that I have is regarding the speed at which you plan to move ahead with the unlocking of value. One year ago you were saying that ALFA was planning a more balanced approach to cash use, basically paying dividends, reducing debt and getting ready for the unlocking of value. It seems to me that you are trying to move as fast as possible today. So I just want to ask you what changed, why you changed this strategy?

Eduardo Escalante: Sure, Alfonso and thanks for the question. I think the companies both Sigma and Alpek have gone through -- the results have gone through significant changes since last year. Alpek in the past had very successful years in terms of results, which allowed them to pay much more dividends to ALFA and to the shareholders, and that helped a lot. On the contrary, Sigma is going through a very positive results for last year and in particular this year. So that gives us margin in order for Sigma is in a better position to absorb more debt from the holding company at the combined entity. So I think that is a significant change. We were -- the changes in the case of Alpek were pretty much unexpected. So we were expecting at that time, the time you're referring to, we were expecting to receive more dividends from Alpek, which is not the case, as I'm sure you remember, Alpek announced that they are not paying dividends for this year since they are being very careful with their own cash flow. So that's why we shift the strategy in order to lower dividends at the holding as well as try to accelerate the demonetization of noncore assets. Again, the target continues to be -- the objective continues to be the same as it was in the past to do the final phase of the restructuring of ALFA as soon as possible. But certainly we had to adapt the strategies that we are following.

Alfonso Salazar: That’s good. Thank you. Thank you, Eduardo.

Eduardo Escalante: You’re welcome, Alfonso.

Operator: There are no further questions at this time.

Hernan Lozano: Okay. Since we don't have questions in the Q&A, we'll move on to Sigma. So let's 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 Rodolfo Ramos of Bradesco. Please sir, go ahead.

Rodolfo Ramos: Thank you again for taking my question. Just a couple. Roberto, if you can give us a little bit more color, I mean, we understand that Mexico is undergoing a very positive consumer environment, but just like if you could maybe talk a little bit through that 8% volume that you saw during the quarter. I mean, how much -- how resilient do you think is going to be more on a long-term basis, and if certain categories channels are coming across as very strong? So that would be the first one. And then second on the cost side. I'm not sure how exposed you are to any of the labor pressures that we've seen, whether it's minimum wage, whether it would be the reduction of the work week eventually. How are you thinking about those potential cost pressures? Thank you.

Roberto Olivares: Thank you, Rodolfo, for your question. Let me start with the first one. Regarding Mexico, yes, as you mentioned, there has been some clear signals of tailwinds that are benefiting the consumption. In general, in Mexico, we’ve seen some decreasing inflation and unemployment, also some improvements in the consumer confidence out of the consumption and increased hotel occupancy rates for food service business. But I will say that this effect is not only externally driven, we’ve been also gaining some consumer preference in our categories, thanks to our consumer centric innovation approach, and I would say also our careful approach over balancing long-term volume and margin. In terms of some of the categories, we have been increasing, as I mentioned in my initial remarks, volume in all categories, processed meat, cheese, yogurt and some other categories that will participate in all channels. Some channels are increasingly a bit faster than the other ones. For example, the modern channel is gaining more volume than the traditional channel particularly, but we see a general effect in the whole Mexico region. And in terms of the cost side, yes, we’ve been exposed to all the new regulation and reforms regarding labor in Mexico. Some of them we’ve been able to mitigate through looking for efficiencies in other parts of the business in order for us to not necessarily do all the pass through of these extra costs or expenses into the market. Regarding the working hour reform, if this comes to materialize, we do see some potential impacts, mainly coming from extra time that we will have in our operations. But we have mapped some mitigating measures and I think we are ready to implement some of them in order to reduce that impact. Some examples will be working on the [indiscernible] with support of a staff to cover breaks, also looking for efficiencies in the processes by eliminating anything that is not essential, and also working on optimization of some of our plans.

Rodolfo Ramos: Thank you.

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