Sigma Foods, S.A.B. de C.V.

Thank you. Good afternoon, everyone and welcome to ALFA's second quarter 2020 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. 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 risks related to the impact of COVID-19. Eduardo Escalante, ALFA's CFO and representatives from each ALFA company will participate in today's call.

I will now turn the call over to Eduardo.

Thank you, Hernan. Good afternoon, everyone and thank you for joining us today.

Let me begin by saying that I hope everyone is staying healthy and safe. Globally, the macro environment during the quarter was characterized by a general shut down of most economies.

Oil prices which levels we had not seen since 2002. Auto production plummeted down more than 90% in April, and the Mexican peso posted a record monthly average about 24 pesos per U.S.

dollar. All these created temporary distortions to our overall results.

Fortunately, by the end of the quarter we began to see the reopening of many economies and a transition to the new normal, along with some macro improvements. We are cautiously optimistic that the worst may now be behind us.

During the quarter, three of our subsidiaries continue providing essential goods and services, with a steady underlying demand and volume trends. For example, Alpek reported a solid performance from the polyester segment, supported by resilient demand for PET, I mean the increased focus on safety and hygiene in food and beverage consumption.

Sigma saw higher sales in local currency across all the regions in which we operate, when excluding its food service channel, which was impacted by the temporary closure of hotels, restaurants and other establishments. In particular, Sigma's operation in the U.S.

posted outstanding performance as 2Q, '20 sales increased 14% year-on-year boosted by record volume. Also, Axtel's topline reflects a strong demand for wholesale customers for connectivity solutions, provided by its infrastructure unit.

Although, Alpek, Sigma and Axtel were all operating at capacity and saw a steady underlying demand during the quarter. Our results were impacted by several temporary distortions.

Alpek's consolidated revenue was down 29% in the second quarter, reflecting lower volume in Nemak, lower feedstock prices in Alpek and lower food service sales at Sigma, among others. Consolidated EBITDA in the quarter was down 61% year-over-year to $231 million, even a certain key variables, including reference polyester margins and pork prices were better than expected.

Unfortunately, this was not enough to offset temporary distortions that impacted EBITDA. Let me walk you through them.

First, auto OEM shutdowns, these were significant. As virtually all of Nemak's plants outside China, were closed for an average of eight weeks during the quarter.

The estimated impact to EBITDA of this unprecedented event was $160 million. Nemak has also been forced by this situation to implement workforce reductions for which is recorded non-recurring severance payments for $38 million.

Next, the general shutdown of large portions of the global economy, costs, oil and feedstock prices to fall to historically low levels. These resulted in $42 million non-cash inventory loss, plus $39 million impact from raw material carry forward for Alpek.

Third, the temporary closure of hotels and restaurants. Sigma's food service channel, which accounts for more than 10% of sales was affected by an above decrease in demand during the quarter.

Although, Sigma quickly reallocated resources and adjusted its cost structure, EBITDA was negatively impacted by $23 million. And last, the 80 average peso depreciation quarter-on-quarter, which directly impacted FX conversion from local currency into U.S.

dollars for Sigma and Axtel, among other effects on dollar denominated costs. We estimate the conversion impact alone was $27 million.

All in all, the unprecedented combination of virus-related distortions across our businesses, had an estimated aggregate impact of $329 million in second quarter EBITDA. We generally don't discuss monthly trends in EBITDA, but given the unique environment in which we operate today, we thought it would be helpful to provide some additional color as to how the businesses are moving through this pandemic.

It was encouraging to see, significant demand improvements throughout the second quarter, as OEMs and Nemak restarted operations. Oil prices recovered, and the Mexican peso gained some ground by quarter end.

In turn, June EBITDA was more than 230% higher than April, and accounted for approximately 60% of total quarterly EBITDA. As we entered the third quarter, all manufacturing facilities are up and running, and key variables have maintained more normalized quarter end levels.

Next, let me provide a brief update on the progress and implementation of COVID-related initiatives. Throughout the year, our efforts are focused on two key objectives: the continued safety and health of our employees and our ongoing ability to serve our customers responsibly.

During the quarter, all of our businesses roll out employee training and awareness campaigns. Following the guidelines and best practices provided by health and government agencies, as well as safety experts.

We also supported community relief efforts by donating medical supplies. Food, connectivity and even our technical capabilities in some instances.

At the same time, we are aggressively adjusting our cost structure and maximizing efficiencies. All the cost and cash flow line items are being subject to a detailed analysis and review, including networking capital, CapEx and dividends.

Together with our companies, we have identified approximately $850 million in savings and cash flow benefits that could be realized by yearend. This is almost three times the $300 million we announced at our annual shareholders meeting earlier this year.

We took quick decisive actions during the quarter to further strengthen our balance sheet. This include realigning cost structures and lower demand in certain parts of our portfolio.

In particular, Nemak has done an outstanding job, achieving approximately $125 million in SG&A and fixed cost savings between 2Q, '20 and 1Q, '20; also, the revocation of dividends on Alpek and Nemak for total savings of $119 million, although, it is important to note, that Alpek’s Board maintains the option to pay the previously approved dividend later this year. Moreover, CapEx was down 29% quarter-on-quarter and down 21% year-to-date, as all planned investments are being reviewed full potential deferral or reduction.

We expect between $250 million and $300 million in full year CapEx savings. From a financial standpoint, ALFA and its companies amended bank loans were appropriate.

To include new covenant thresholds, taking into account the near-term impacts from COVID-19. Net debt to EBITDA was 3.4 times at the close of 2Q, '20, which compares with a revised covenant of 4 times for this period.

In addition to amending the required loan agreements, new credit facilities for a total of $720 million were contracted during the quarter. To that end, ALFA consolidated cash balance at the close of the second quarter was $2.4 billion, which could be rapidly increase by an additional $2.6 billion from available credit lines today.

We are confident that our current, large cash position and available liquidity provide a strong foundation for ALFA and its subsidiaries, to navigate through these extraordinary times and maintain the flexibility to continue to strengthen our leadership position. Having said that, all the companies are currently moving ahead with long-term strategic initiatives.

Let me highlight a few, Axtel has resumed its process to attract investment and strategic proposals for the infrastructure business unit and the company. The decision to restart this process is supported by more stable market conditions, solid business performance and sustainable interest from potential investors.

We are excited by the prospects of the attractive opportunity that these initiatives could unlock for Axtel and ALFA, as its controlling shareholder going forward. As you may recall, the implied value of this transaction is higher than all the monetizations we completed in 2019, including Alpek's cogeneration plant sale.

We have been very vocal in the past about our plans to evaluate the strategic alternatives for Newpek's assets outside Mexico. As we remain committed to exiting this business, I am happy to inform you that the company is in the final stage of the process to divest the majority of its U.S.

assets. We expect the transaction to close during second-half of the year.

Sigma continues to move into new and fast growing product categories. Its most recent push is the plant-based food market, with the launch of its global plant-based business unit.

The plant-based meat market has an estimated market size of $10 billion, with double digit growth, even before being accelerated by COVID-19. Nemak continuous advancing to support its customers' light weighting and electrification strategies, winning new contracts for structural applications, for pure electric SUVs and crossovers for the European market.

In other news, we might receive the General Motor Supplier of the Year Award for the 16th time, making the company one of the most recognized suppliers in the award's history. Additionally, Nemak received the Volkswagen Group 2020 Award for the Launch of the Year, recognizing its exceptional service and outstanding innovation capacity in providing components for blogging hybrid vehicles.

These ongoing recognitions from some of the world's leading automakers bodes well for future business. On the capital allocation front, we've repurchased more than 70 million shares during the second quarter, reaching a total of 146 million shares repurchased and held at treasury today.

These represent roughly 3% of total shares outstanding. We plan to cautiously continue buying back shares as we believe the current share price does not reflect appropriately or business fundamentals and attractive long-term prospects.

A final note on guidance, we are encouraged by early signs of stabilizations in some key variables, and we're seeing underlying demand for essential products and services. However, we are mindful that we are still living in an uncertain period, making it difficult to accurately predict how all the businesses will perform for the remainder of the year.

As a result, we are not restating guidance at this time. However, we plan on doing so as soon as reliable estimates can be determined.

Looking ahead our response to COVID-19 will continue to be proactive and dynamic, as we transition into the new normal. I am confident in our ability to overcome the crisis rapidly and emerge in an even stronger position, building upon the sequential improvement observed during the second quarter, a solid financial position, and especially the talented teams behind a portfolio of leading businesses.

My sincere appreciation to each and every one of our team members worldwide, who have come together and responded extraordinarily during this unprecedented time. This concludes my remarks.

Keep well, and stay safe. We are now to take your questions.

We are now ready to take your questions. Please, Hernan?

Thank you. As always, we will take your questions together with representatives from each business.

We would like to begin the Q&A session with questions on ALFA. Eduardo and I will take questions on ALFA or corporate matters.

Laura, please instruct participants to queue for questions on ALFA.

Thank you very much. Hi everyone, thanks for the call and for taking my question.

Two questions if I may, actually three questions. This quarter you're pushing forward [Indiscernible] strategic initiatives Alpek, the RPG project, the food base or the base food initiative and a few other minor things.

Can you talk to me or to talk to us about whether this is -- how should we think about this? Is this kind of a coincidence that it just kind of focus into this quarter?

Or has anything happened more at a strategic level at the ALFA Canada? So that's question number one.

Question number two relates to asset allocation. You bought a number of shares, you put as [Indiscernible] shares.

What is the thinking about those shares? Will they be canceled?

Or could they be sold back into the market? What would that depend on?

And then finally, if you can update us on thinking about a potential IPO of Sigma? Thank you very much.

Thank you, Nikolaj. Thank you for your questions.

Let me begin by saying that, we all maintain the long-term plans and strategic initiatives in each one of our businesses. After seeing the quick recovery during the second quarter of the market, we have decided to keep those long-term plans.

So, we will continue as a whole overall. It will continue innovating and growing high growth segments, like the Sigma's lacking and the plant-based business unit.

Sigma will continue with the very strong drive in this segment. We will also continue moving towards a business realignment in ALFA, as we have discussed and I just mentioned, we will continue with the divestment of the oil and gas assets and with Axtel infrastructure or whole business sale.

As it was announced today, we are moving forward with that process. We feel the times are very appropriate to do so.

I can comment that, clearly, we are very happy that the infrastructure unit has proven very resilient during these hard times. So, we think, we are at a very strong position to be able to do a successful transaction with this business.

We plan to continue doing some selective expansions. As you may recall, Alpek's acquisitions in UK and Brazil, previous to that, they have been very successful but also selectively we plan to continue doing so.

And finally, we plan to continue maintaining our financial discipline and trying to return capital to shareholders. We paid $100 million dividend earlier this year at ALFA and we will continue.

Let me mention that we will continue looking opportunistically at share buybacks. We think the current price for our shares does not reflect the business solid fundamentals that we have in each one of the companies, as again, has been proven during this second quarter, with the very quick rebound that we have had, even in the companies most affected.

And now that I mentioned the buybacks. Regarding your second question, what I can tell you is ALFA has never sold one of its shares.

Historically, all of our shares have been canceled after we exercised any buyback. At this time, we have no decision.

We are holding those shares at treasury. But again, we have never sold one of the shares that we previously bought.

And finally, regarding the IPO of Sigma, as we had stated before, the tension continues to be in having each and every one of our companies to be a public entity. Certainly, we don't think this is the right time to start moving ahead with the Sigma IPO.

But the drive for ALFA is to have each one of our companies operating as a public entity, and being as independent as possible.

Got it. [Non-English].

Thank you. Can you comment on use of proceeds if you were to sell as you mentioned, the energy business or the telco business or another business?

Would you be thinking about buyback dividends that payback or buyback of the debt? How are you thinking about that kind of decision?

Sure, Nikolaj. We do plan to reduce debt first and foremost.

In particular, now that our net debt increased, our net leverage increased significantly to 3.4 times, of course, due to the decline in EBITDA which we expect to rebound going forward. But we are maintaining our target of being at or below 2.5 times net debt to EBITDA.

So, the priority is to reduce debt both at the Axtel level, as well as at the ALFA level.

Thank you.

You're welcome.

Hi, Hernan. Hi, Eduardo.

Hope you guys are doing well. Just one quick question kind of related to what Nick was asking and then trying to -- if you could comment a little bit on how should we think about the role of the holding evolving going forward?

I know you've talked about some of the divestments, but I wonder, if at some point we should consider you lounging, perhaps a new significant division. And if not, how should we think about the debt at the holding level and also the OpEx at the holding level on whether there are particular initiatives to lower that, or if that's a highly contingent on less than Sigma as an IPO?

Thanks.

Hi, Luis. Thanks for the questions.

First and foremost, we want each and every one of our companies, as I mentioned before, to be as independent as possible. And we have been doing so for some time.

We are aiming at reducing the dependency that they may have on the holding company, on ALFA’s holding company for some of the services. We plan to continue moving forward towards that goal.

And together with that, we plan to continue reducing what you call the OpEx or the expenses that we have as a holding company. We have been reducing that, in particular, the last few years, and even accelerating the reduction in the last few months, especially when you consider how much the companies have grown in size and global footprint.

We plan to continue doing so, certainly. We will aim reducing the holding level expenses as much as possible.

Regarding the debt, I have mentioned before, and we will reiterate at this time that we do not feel comfortable with the debt levels that we have at the holding company. And we plan to use the proceeds from the asset sales, in particular the Axtel project to reduce the debt at the holding company.

Let me take this opportunity to compliment what I would say to the previous question on Nikolai, the way we see the infrastructure project, we see that as a great opportunity to reduce debt at the ALFA level, again at Axtel and also at the holding company. The infrastructure business unit had an EBITDA year-to-date this year of $115 million.

When you consider that Axtel expects to do a transaction at a level of a double digit regarding that business unit, we think it's going to be very significant and a very good opportunity to reduce debt for ALFA.

Great. Thanks a lot, Eduardo.

You’re welcome.

Yes, hi. Thank you for the call.

So, following up on this, what you just said, did you wish to sell the Newpek and Axtel assets? What do you think you could end the year in terms of leverage?

And how confident are you with the 4 times covenant? If everything remains constant and you're not able to make these divestments, a 25% drop in EBITDA during the second-half of the year would take you through this 4 times leverage, correct?

Yes, let me talk to you a little bit about leverage. I think that's a very important issue.

Thanks for asking. First, let me mention that we do not expect to have a problem with any of our covenant current thresholds.

We have done all the amendment that we think maybe needed. And we are a very much on the safe side of those thresholds.

Even considering not only in temporary distortions from EBITDA at ALFA and Nemak, but also if we have problems going forward. So, we have more significantly high from the 3.5 times net leverage levels that we had in most of our covenant, and certainly, the financial institutions we deal with have been extremely helpful regarding these amendments.

So we do not expect to have any problems going forward with that in any one of our businesses. Today it's very difficult for us to make a projection of where we would end up in terms of net leverage by the end of the year, because it's hard to estimate how the EBITDA is going to evolve in the second-half of the year, same reason why we are not providing guidance, a new guidance for the year at this time.

But again, we feel comfortable that the going forward quarters are going to look much better and we are going to grow our leverage position. We will continue driving towards being below 2.5 times net leverage on the consolidated level.

And again, that is the main use of proceeds that we will do with the divestment.

Alright. Thank you very much.

You're welcome.

Good morning, everyone. I have two questions if I may.

The first one, it's about if you can share with us the estimates you have for financial expenses, taxes and corporate expenses for 2020? And the second one has to do with some of your subsidiaries are evaluating some M&A opportunities.

I wanted to understand if ALFA is supportive of that M&A. How does it rank versus deal and distributions from these same subsidiaries?

Thank you very much.

Regarding your first question Andres, the financial -- we do not expect a very significant increase in the financial expenses for the year. Certainly, we haven't growing in a little bit of additional expenses due to the negative carry that we have since we increased our liquidity during the second quarter, just to make sure that we were able to face in terms of liquidity, any problems from COVID-19.

But at the end of the year, we expect to be very much I would say in line what with our early estimations for the year, again for financial expenses. Regarding taxes, we are certainly having lower results this year, which should drive lower taxes, lower expected taxes for the year.

And regarding the M&A opportunities, we will continue supporting each and every one of our businesses in their own strategic initiatives. And I think in some cases, the current situation in some markets affected by COVID-19 may create opportunities.

And we'll look at them when any one of our businesses identifies any one of those opportunities. We will certainly look at those.

We think there may be opportunities. I really cannot name anyone in any one of the businesses today.

But we think that there may be opportunities very much aligned with the strategic initiative of each one of the business. But nothing to discuss at this time, nothing that we see in the very short-term.

Thank you. Hernan, Eduardo, I hope you can hear me well.

My question is regarding the Newpek asset sales in the U.S. Do you have an estimate for the proceeds that you expect to obtain?

Thank you.

Hi, Vanessa. Thank you for your question.

We do not have a figure at this time. But I have to say, the most important issue behind the divestment is not how much we can obtain from it.

Really, what we want to do is realign our business portfolio, as we have discussed before and exit this business outside of Mexico. And that's also true, we want to eliminate future cash burn and obligations that we have in those businesses.

So, we do not expect to have significant inflows from this divestment.

Okay. Understood.

Thank you.

You're welcome.

Hello, thank you for the call and for taking my question. I just wanted to see if you could confirm please the cash balance and available credit lines at the holdco level?

Thank you.

Sure, Peter and thanks for asking. Consolidated cash balance at the close of 2Q, '20 was $2.397 billion, plus a $2.633 billion in available credit lines.

That's on a consolidated level. And at the level of the holding company, today we have about $200 million cash on hand and a more than $50 million in available credit lines.

Thank you very much.

You're welcome.

Good morning, Hernan, Eduardo. Thank you for taking my question.

Just a quick one on your savings. You mentioned around $100 million.

Could you give us a color on what of those are at the holding level and which are permanent savings? And second one is regarding divestment.

You already mentioned divestment across Newpek, Axtel and Alpek. Could we expect divestment around Sigma or Nemak?

Those are my questions. Thank you.

Let me begin with the cost savings. As you mentioned and we have stated, we are aiming at obtaining $850 million in cost savings and cash flow benefits.

The main ticket items for those savings are net working capital, we expect to be around $160 million versus original plans. And most importantly, we plan to have savings in terms of CapEx between $250 million and $300 million.

We also expect to have some savings for the time being with dividends, as well as what we discussed regarding taxes and some other expenses. Regarding ALFA, the holding company, we have solid plans to reduce the corporate expenses today.

At about I would say the order of 15%, one five, and we are working internally together with the companies in order to increase those savings going forward.

Okay. 15% right?

Regarding the -- yes, go ahead.

So the 15% reduction in corporate expenses, right?

Yes. Again, that is the plan, very solid actions that we have identified and we are already implementing.

And we are working towards increasing that reduction furthermore. And regarding your other question of divestment in Sigma or Nemak, we are always open to divestments in some of our companies at the right conditions.

Today we are not engaged in any project to do so, but certainly if the opportunity comes and we see value creation for our shareholders in doing so, we will look at that. And Axtel and the sale in Alpek are very good examples of that.

Let me rephrase the question, if I may. Would you be willing to take up a partnership so you can monetize an investment in Nemak or Sigma?

Again, we think the current market values of the companies do not reflect the fundamentals of the operations. I may take that comment earlier in the call for ALFA, but the same thing applies for a company.

The same thing applies for Nemak for Alpek and for Axtel from our point of view. So, if the right offer comes along and under the right conditions, we will certainly be open to look at that.

Regarding Sigma, that is a very special case, because if you look at Sigma and estimate the value of Sigma, the market cap of Sigma considering the multiples of comparable companies, that is pretty much the same level of that ALFA the same value that ALFA has today as a whole. And of course that doesn't make a lot of sense, but if you look at a reasonable multiple for Sigma, and being at the same value of the whole ALFA company, doesn't make any sense.

So again, we are open. We think there is a significant distortion in those prices, on those values and the companies are not being recognized for what they are really worth.

Okay. Thank you, Eduardo.

You’re, welcome Alejandro.

Hi, thanks so much for the call. I have two questions relating to your debt.

My first one is, have you had any recent discussion with the rating agencies? And if so, have they given you any timeframe for when they'd like to see your leverage return to more historical levels?

That's my first question. And then secondly, you mentioned your desire to reduce debt at the holding company level.

Would that involve buybacks of either one or both of your bonds, ALFA bonds? Or do you have any other debt as the holdco debt would be paid back?

Thanks.

Sure. Jamie.

Thanks for the questions. Regarding the rating agencies, we have been very close contact with them, explained to them what is happening in each one of our businesses.

Out of the four main businesses that we have, Alpek, Sigma and Axtel have been very resilient to the conditions generated by COVID-19. So we do not see any problems.

And to be honest, even in the case of Nemak, I think in the case of Nemak, the volumes rebounded quite fast. And we saw a significant improvement month to month during the second quarter.

So we feel confident we'll be able to go back at least to the normal level of operations in each and every one of the cases. We will continue discussing these with the rating agencies.

We certainly do not feel comfortable with the levels that we have of net leverage, and we'll continue driving towards reducing that. I also think that our company and in particular Nemak have responded quite quickly to adjust the cost structure, and put it in line with what they are being impacted by their own markets.

So we feel confident going forward. And regarding the holding company, what we have at the holding level are two bonds.

One matures in 2024; that is $500 million. And the other one is longer-term, it goes all the way to 2024.

At this time, we are not looking at doing any tender or any buybacks of those bonds. We have to get the cash first.

We do not have the cash at this time and we do not have the resources to start planning on that. But certainly, we'll look at some opportunities when we have the cash from the divestment.

Other than the two bonds at the holding company, we really don't have any additional long-term debt. We do have a lot of cash on hand today, as we mentioned before, more than $200 million.

But that is just to be able to have liquidity in case we had any problems which at this time we do not see.

Great, thanks so much. Thanks for the color.

You're welcome, Jamie.

Thank you. We will then take questions on Sigma.

Roberto Olivares, Sigma's CFO will answer your questions. Laura, please prompt for questions on Sigma.

Hi, Eduardo. How are you?

Just two quick questions on Sigma. The first one is on the food service performance.

If you could provide some sort of details, I understand it's a little bit over 10% of you sales. But if you could provide a little bit of detail, how much is that by region?

And what was the performance throughout the quarter and whether you exceeded the quarter and so far, what you're seeing in July in terms of improvements are not? That will be my first question.

And then the second question, and I appreciate the level of details you guys gave in terms of sales in local currency and excluding food service. And when I look at that, there's a quite a bit of a divergence between sales growth in the U.S.

versus Europe. And I was wondering if you could talk a little bit about what's your feeling in terms of why such a big divergence in terms of consumer behavior for your kind of product?

And also a related question there is also on the margin side, we see U.S. margins moving along quite nicely, expanding quite nicely.

But the European margins kind of stuck in that 4% range, so I wonder if it's just a matter of time until those margins catch up because raw materials come down a bit, or there's something more structurally at play here? And what should we expect in terms of the margins in Europe to evolve and in what timing?

Thank you.

Hi, Luis. Thank you for your questions and I will go one by one.

First, let me talk about food service and thank you for again your questions. What I will say is that during second Q '20, we did keep having the impact across all the regions of the food service sales volume.

But as of today some restaurants and hotels are starting to reopen gradually, so we estimate that this channel fate might start to recover during the next couple of quarters. Let me talk a little bit of some examples, for example in Mexico we have information that in the beaches, Cancun, Baca region and Vallarta [ph], now the hotel occupancy rate is now around 30% -- between 30% and 40%.

I know that some restaurants are starting to reopen with some new rules and normality and protocols, but they start to reopen. That will be also the case in Europe.

In Europe, our exposure on food services more on Spain and Italy, so both of those countries were highly impacted by COVID-19, but now as they move to a new normality things are getting better in terms of volume. But anyway, it seems first Q '20 we'll start looking at some actions to mitigate the impact.

We'll start by relocating some of our employees to the retail channel as that channel has increased demand. And also we decided to implement that rightsizing process to ensure the business continuity and to prepare ourselves to be better positioned for when the food service market starts to pick up again.

We're very excited about these opportunities that potentially will make us win some market share, again when the industry start to pick up again. And on this matter let me give you a couple of examples which I think are really good to state in this call.

We're working on optimizing our portfolio, looking into better ways to serve our customers, again, looking into more profitability. We're developing some capabilities to serve our food service customer to e-commerce, which is even more relevant right now, and it's also very efficient way to operate for us.

Also doing some piloting about e-commerce direct-to-consumers. And although, it's right now as more pilot we have seen the sales of this opportunity growing week-by-week.

Also, with all of these mobility restrictions we're looking into obviously more delivery services. So how to serve the dark kitchens, these new trends of kitchens that are for rental and they use for delivering foods.

So we're looking into a lot of options to try to be very prepared for when the industry starts to pick up, so we're well-positioned to gain some of the market share. In terms of -- let me go to the second question in terms of the growth in sales in the U.S.

versus Europe. I think we're very excited about the results in the U.S.

Both our Mainstream and our Hispanic business segments presented as Eduardo mentioned a standard performance and record volumes, in spite of price increases versus last year. And this is explained by people, obviously, eating more at home.

We do expect some of this volume to continue during the rest of the year. So I think it's a very good news for this particular region.

Also raw material prices are lower than last year, due to the high pork inventories in America, and the lower demand from food service. So with this we'll reach as I stated in our report a record high EBITDA margin of close to 19%.

In Europe on the other side did not see that sales volume increase as the U.S., and this has to do with mainly COVID-19, because of the impact of the food service region. Again, Spain and Italy being the most highly impacted.

Also lower economic activity in the region because of the mobility restrictions. And also, if you may remember, we have increased prices a couple of time last year and even the beginning of 2020.

So the electricity effect on that side. On the positive side, on Europe raw material prices have consistently decreased in the last couple of months, again, lower mid demand from food service and also lower export to China.

So we have seen significant lower prices than those that we were expecting. And these will probably help us recover some of the margin in the coming months.

I don't know if that answers your question.

Sure. That was very helpful.

Is it possible to think of double digit margins in Europe at some point in the future?

Sure. So that is our plan which I think a lot has to do with once ASF is fully cleared out of the raw material environment.

Also, as I have expressed in previous calls, we're trying to optimize our footprint in order to have a very expense structure. And also moving a lot into innovation, so all of these efforts that we have been doing in the previous months and these months about plant-based about the snacking, these products have a higher margin than our core products.

So, we do believe that if, once we move more to this value added products, we will be able to reach something close to double-digit.

Okay, great. Thanks a lot, Roberto.

Thank you, Luis.

Hi, ALFA team and Sigma team. Thanks for taking my question.

Just two questions. The first one is regarding Mexico results, excluding food service.

I see that they were -- obviously sales up 8%. And I think this was mostly -- I would imagine this is mostly pricing that doesn’t.

So how are you -- what's your feelings regarding the Mexican consumer of your products after the pandemic? Also what do you expect to happen in Mexico?

Have you seen an acceleration of volumes from cooking at home trends? What are you seeing in Mexico.

And perhaps regarding pork prices overall, if you could add some color to what we have been seeing. So prices in Europe have declined a little, prices in U.S.

are falling a lot, and prices in China have accelerated a little bit in the last month, so I would like to understand what do you think is behind those dynamics?

Sure. Thank you, Alejandro.

So regarding Mexico, I think the results were -- or sales by channel were mix, as we mentioned. Food service was impacted and also the restrictions in the mobility and the lower economic activity also impact somehow the volume in the convenience channel.

On the other side, sales in supermarkets and mom-and-pops both growth during the contingency, mitigating some of this impact. Sales of most of our categories are growing.

And also as we mentioned, volume from our prepared meals category is increasing significantly because people are eating more at home. In terms of pork prices, I think it's okay to talk about the three different regions.

In the case of -- let me start by China, because I think it's the one that starts to move the rest of the regions. The situation in the sub situation in China is getting better.

One is that, we have seen lower demand again because of COVID-19 in the food service retail in the food service sector. So that has really some pressure from the market.

Also, we have seen that the production is starting to reveal again before I mean, we have seen these before we were expecting it. And with that imports from Europe and the U.S.

have not grown as expected. In the case of Europe prices, as I mentioned in the last couple of months have consistently decreased, again because of COVID-19 lower foodservice demand and also because of lower export to China.

I mean right now prices are lower than last year, a lot lower than what we expected, and we expect these prices to continue holding in these levels for at least the next couple of months. We do not see unless something significantly changes.

We do not see that this will change. In the case of the U.S., the U.S.

is on a similar situation, but for different reasons, as in the U.S. production of pork has increased a lot in the last years.

We come with a lot of high inventories to this pandemic and then the pandemic lower demand. So surprises plummeted for the most part of the quarter.

And although, we don't think that the prices will be able to keep up those prices for the rest of the years, we think they might increase a little bit. They're going to level off to a level that it will be significantly lower to last year or even average prices.

That's perfect. Thank you very much.

Thank you, Alejandro.

Hi, Roberto. Thank you for taking my question.

Just a follow-up regarding Alejandro's question. Could you share with us some color on how is the traditional market behaving in Mexico?

Is it flat? Is it growing?

And the other one is if you could give us more substance on how much it weighs today your plant-based foods business in terms of sales and the snacking business?

Sure. Thank you, Alejandro.

So, by traditional channel you mean the mom-and-pops.

The mom-and-pops. Yes.

Okay. So, yes, mom-and-pops has been -- if we compare the sales of mom-and-pops in the last month with the pandemic and we compare it with the sales before the pandemic, so before the COVID-19 start to appear in Mexico, we see an increase in the sales.

So, around double digit increase in sales in that particular segment. So, we have seen good results there.

In terms of plant-based and let me talk a little bit about this opportunity. As Eduardo mentioned, we see this as a big opportunity for us.

It's a market size of around $10 billion and growing at double digit, especially in Europe and in the U.S. So that's why we decided to create this business unit to sponsor our current portfolio across all of our regions, using the innovation processes that we have right now.

And the knowledge and best practices that that our operation in Europe has already developed on this matter, given that they are more advanced in this sense. One of the key levers in the industry, as we see it is R&D capability, which is one of our strongest pillars in Sigma.

In fact, we started developing plant-based products more than 10 years ago in Mexico. So, we have already have proven capability.

And if we leverage with that our current innovation process and our leading brands, we believe we have a right to win in the sector. Current sales are very low, actually lower than 3%.

But, I think we're still a long way to go, where it's just starting. We have around 50 plant-based products already in the market.

There's 10 more coming in the next month. And we do see here some potential.

Do you take lower than 3% in both business unit, plant-based and snacking right?

Yes.

Okay. Thank you, Roberto, and stay safe.

Thank you.

Thank you. Let's move forward and take questions on Newpek.

Rodolfo Gamboa, Senior Vice President of Oil & Gas, will answer your questions. Laura, please prompt questions on Newpek.

Hi. Thanks for taking my question, just a quick one.

Regarding the Mexican operation, so in particular opportunities for developing or exploring in the Burgos region, some specialists have pointed out that perhaps before if gas prices rise significantly, we could see an interesting opportunity for developing shale assets in the Burgos field. I know it's difficult to predict because of government policy and [Indiscernible].

How attractive is this opportunity for ALFA? Do you think it is a strategic?

Or do you think it's more important to just reduce exposure to the oil and gas business? Thanks.

Yes. Thank you, Alejandro.

In a scenario of increasing gas prices would be a game changer for a lot of the gas producing owning companies. In the Burgos basin specifically, I would like to clarify that shale is not necessarily a target, most of the Burgos basin gas reservoirs are conventional reservoirs, do require some simulation from time to time.

But in that scenario definitely matters will become far easier to justify further investment and development. At this time, we're really keeping things to the minimum in the Burgos project, and we've done a lot to cut costs and reduce and optimize activity.

Just yesterday, we got an extension of four months from the CNH, one our obligations for one of the blocks. So, we're really taking things very slowly and minimizing our activity wherever possible.

Just as a follow-up. I'll ask this another way.

Do you think ALFA will retain optionality for developing this just in case? Or do you think the idea is to get out of this business eventually of this opportunity?

At this point, the plan is still to keep the optionality, and as long as it is a low cost option.

Thank you very much. Very clear.

Yes, thank you. So we that we can get a sense of the size of the divestment the U.S.

assets since the EBITDA division has been negative for some quarters now?

Yes. Thanks, Eric.

As Eduardo mentioned, at this point we're not necessarily able to pinpoint a value. And in reality the greatest benefit like Eduardo mentioned in this response.

The main reason for getting out of the U.S. assets and divesting at this point is to ensure that any negative cash flow or cash burn in the future is really mitigated.

So overall, it will be a positive transaction, but main reason is to really step out of the U.S. and concentrate in Mexico.

Okay. Thank you.

Thank you. Let's move on with questions on Alpek, Nemak or Axtel.

These companies held their earnings conference call earlier this morning. José Carlos Pons, Alpek's CFO; Alberto Sada, Nemak's CFO; and Adrian de Los Santos, Axtel's CFO are all here with us to answer any additional questions.

Laura, please instruct participants to queue for questions on Alpek, Nemak or Axtel.

Thank you. So this question is for Nemak, a follow-up from what was said in the conference call, regarding the $4.5 million equivalent units as a new breakeven point compared to the 6.5 million that was previously.

And then you mentioned that 60% of the cost savings would be permanent. So, what would be the new breakeven point on a stabilized basis going in the medium term?

Yes. Thanks for the question, Eric.

Related to the breakeven point as it was highlighted on the call earlier today, thanks to these adjustments on the cost structure that we performed. We were able to reduce that breakeven by 20 percentage points.

So before it was close to 60% of our volumes, now it's at the rate which is close to 40%, or the 4.5 million equivalent units that we had in this quarter. So, out of those cost elements most of the labor cost adjustment or a big portion of that will be on a portion of the discretionary.

We believe that will be permanent and that is the 60% that we discussed. And 40% will be variable cost adjustments that depending on how the volume moves in the next few months, we'll be seeing that part of the cost come back to the system.

So, we believe that we will be able to maintain the breakeven point at that close to that 4.5 billion equivalent units going forward. So, certainly we have all the elements to adjust the cost structure, to make it as variable as we can.

So, if on the very unlikely scenario, we see volumes coming down again to such levels, we should be able to sustain this breakeven point.

Okay. Understood.

Thank you.

Thanks, Eric.

Hi, guys. Thanks for taking my questions.

Just a quick one on Axtel. I know you already mentioned about timing and about the information a lot of multiple, perhaps just to get a little bit more of a sense of where the divestment process for infrastructure is?

I know you already reached the agreements between Axtel network and the service business. Just what are the next steps, perhaps receive formal bidding of binding offers?

Or what are the next steps in this process?

Hi, Alejandro. This is Adrian de Los Santos.

As mentioned in our call and by Eduardo earlier today, we are resuming the process and that means taking over where we left in early March. And basically externally we are starting to go ahead with information, updating whatever is necessary and then expecting to get into second phase, meaning, eventually receiving economic proposals.

We expect that to be the next step with investors. And internally, we did continue moving in terms of the separation, the framework for the inter-units agreements.

So, I've two processes, the internal and the external are moving ahead. And timing really depends on the investors and on the possibility to have virtual meetings and all that.

But that's basically where we are in the next steps.

Thank you very much, Adrian.

You're welcome, Alejandro.

Thank you. Well, we very much appreciate everyone's participation today.

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.

Take care and have a nice weekend.