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

Thank you, Sherry. Good afternoon, everyone, and welcome to ALFA's 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 when we 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; Carlos Jimenez, Alfa's General Counsel; Roberto Olivares, Sigma CFO, and representatives from each Alfa Company. Before moving on to a discussion on results, just a quick reminder that as a result of the upcoming spinner, Axtel meets the definition of a discontinued operation in accordance with IFRS.

And we began accounting for these subsidiaries as a discontinued operation in the third quarter 2022. Unless otherwise specified, all consolidated figures referenced in this call, exclude Axtel.

I will now turn the call over to Eduardo.

Thank you, Hernan, and good afternoon, everyone. We greatly appreciate your participation today.

First quarter 2023 was in line with our expectations, reflecting the solid performance from Sigma and the anticipated year-over-year decrease at Alpek. Progress continuous on the transformational front with the Axtel spin-of nearing its completion and financial flexibility at the Alfa level, enhance the full redemption of Senior Notes.

At the same time, we continue transferring value to shareholders through reason dividends paid in March. First quarter consolidated sales were $4.1 billion and EBITDA was $376 million, keeping us on track to achieve 2023 guidance.

Many of the temporary tailwinds that drove records Alpek performance, during 2021 and '22 have returned to normal levels. These factors include ocean freight rates, and global reference margins, among others.

As a result, Alpek reported 12% lower revenue and a 59% decline in EBITDA. Adjusting for extraordinary items, Alpek's consolidated EBITDA was down 38% reflecting the normalization of macro drivers on Soft demand.

amid a slowdown in certain sectors. It is important to note that extraordinary items correspond primarily to $14 billion nonrecurring costs associated with the shutdown of the PET resin operation at its Cooper River site in South Carolina.

Alpek is keen at continuously improving cost competitiveness across its operation to enhance its leading industry position. The Cooper River shutdown is part of the company's comprehensive efforts to strengthen its core -- its core business, driving estimated annual savings of $20 million and improving capacity utilization by transferring PET production to other sites.

I will now turn the call over to Roberto Olivares, Sigma CFO. To let him discuss the company's strong third quarter results and progress on strategic initiatives.

Please Roberto.

Thank you, Eduardo and good afternoon, everyone. I'll begin with an update on our quarterly financial and operational results, and briefly mentioned a couple of noteworthy developments regarding the execution of business strategy.

We began 2023 with a strong first quarter as consolidated revenues reached $2 billion, making these our highest quarter yet, up 16% versus 1Q '22. Revenues reflected growth across all regions, and were driven by price momentum, a slight increasing consolidated volume, as well as the appreciation of the Mexican peso.

In Mexico, solid demand for our products translated into a 6% volume increase year-over-year, which more than offset the lower volume in Europe amid operational adjustments in response to market conditions. Consolidated EBITDA rose to US $192 million, our record first quarter figure of 19% year-on-year, that was due to the payroll performance in the Americas.

In Europe, we made significant progress in mitigating the impact of inflationary pressures. Revenue management initiatives included a 29% average price increase in local currency.

Moreover, energy prices have come down from their peak levels in 2022. However, current industry dynamics continue placing pressure on meat raw material, and other input costs.

We remain focused on improving profitability in the region to targeted top-line actions together with cost and expense reductions. Moving on to strategic initiatives, we are balanced in our effort to expand capacity in the U.S.

During the quarter, we sign an agreement to acquire food production plant in Iowa, that is uniquely positioned to better serve our customers from a supply chain standpoint. As a result, the operational network in the U.S.

will consist of seven production plants. In addition, we conducted an equipment innovation project to increase capacity at our Altus facility in Oklahoma.

These actions will help us to continue to grow in the region. During the quarter, we established the administrative efficiency office to strengthen the generation of cross-border synergies, centralize non-core processes and foster best practices across the regions.

This shared service office we consolidate activities to improve the spending efficiency, maximize outcomes for processes and ensure optimal performance. Our goal with these efforts is to improve the company's competitive position and provide resources necessary to continue exploring the future, launching new business models and developing novel categories.

As we strive for sustainable long-term growth, we are encouraged by the improvement achieved by the more than 260 employees who are part of our sustainability community and the many more that are responsible for executing the various ESG initiatives. As of the end of the first quarter Sigma’s CDP supplier engagement rating improved to A minus, a multi-step increase that reflects the actions underway in our value chain.

Our climate change and water results were affirmed at B rating. In addition, our sustainalytics ESG Risk Rating improved to Medium or one category increase from our previous rating.

These results, evidence our clear commitment to sustainability and increased transparency and disclosure we have sought to achieve. We are confident that our practical approach when facing challenges.

The capitalization of lessons learned, and the structural changes underway will better positioned the company to capture opportunities and deliver continued value to our stakeholders. Thank you for your attention.

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

Thank you, Roberto. We have come a long way over the past few years following the discipline and methodical approach to unlock Alfa’s fair value potential by efficiently simplifying it's corporate structure.

Since we announced a plan in 2020 even that was successfully spun-off; Axtel will soon be spun-off. Alpek and Sigma have gained and autonomy from Alfa related services and corporate expenses have significantly decreased.

Most importantly, Alfa has a firm commitment, and a unique position to continue this orderly transformational process with a flexible time horizon. Our focus is on finalizing on finalizing the Axtel spin-off, and on finding the most efficient path ahead.

In our Shareholders best interest, these involves an exhaustive analysis. From a financial standpoint, we must ensure a strong position at Alfa, Alpek and Sigma in any step forward.

Hence it is crucial for Sigma to resume growth and improve the leverage ratio. We have also been vocal about our view that the process requires a significant reduction in debt at the corporate level.

Fortunately, the combination of Alfa’s valuable asset base and in businesses is strong cashflow generation present various opportunities to reach our goal through organic and inorganic means, over time. During the first quarter, we successfully put in place a more efficient bases for the required debt reduction.

They will do $500 million in senior notes in 2024 by obtaining multiple long-term bank loans, which are pre-payable at any time. As a result of this transaction, Alfa gained crucial flexibility with respect to the timing and size of future debt repayment.

regarding the Axtel spin-off, we remain actively engaged with the Mexican securities and Banking Commission as well as all the relevant parties. The require registration process, reach an advanced stage following a series of productive interactions since our last conference call in mid-February.

We look forward to June being able to list Controladora Axtel, could you the entity that received Alfa’s controlling stake in Axtel and will be distributed to Alfa shareholders? We have been diligent in following a balanced approach towards capital allocation combining dividend, CapEx, debt reduction and share buybacks.

March as approved by shareholders, we paid the cash dividend or $0.02 per share, which is equivalent to approximately 96 million. ALFA intends to make a second dividend payment before year-end.

The Board of Directors will determine the feasibility to do so, as part of the regular capital allocation analysis during the year. This kind of flexibility related to the size and timing of dividend payments is aligned with Alfa’s balanced approach.

We will continue implementing a transformational efforts by maintaining a disciplined transfer of value to shareholders in the short-term. Let me close with a brief comment on 2023 guidance.

We are on track to achieve the consolidated guidance we laid out during last call. As a reminder, we expect consolidated revenue to be $17.4 billion and comparable EBITDA is projected at $1.6 billion in 2023.

However, Alpek revised down CapEx guidance by $110 million, considering a longer than expected time to analyze investment optimization opportunities, and complete the internal approval process for certain projects. Therefore, Alfa’s guidance was adjusted by the same amount, resulting in consolidated CapEx of $622 million for the year.

These concludes my remarks, we are now available to take your questions. Please Hernan.

Sure. Sure.

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

As a reminder, Sigma, Alpek and Axtel will be available to answer individual questions later in the Q&A session. [indiscernible] please instruct participants to queue for questions on ALFA.

Thank you, everyone. Good afternoon.

Just one on ALFA and maybe there's another bit of overlap with the Sigma but let me kick off with one on unlocking value on your unlocking value initiative. I just want to see, this performance on sigma during the quarter was certainly a good surprise on the other hand, you have Alpek performance at least on the operation about also the share price has had a significant correction.

Just wanted to see how does these two factors know the fact that you have a stronger Sigma, which was something that you wanted to see before moving ahead and in the rest of the steps in this unlocking value initiative. And also, the lower value that Alpek is now commanding, how does this perhaps influence your timeline as in regards to your unlocking value initiative?

That would be my first one.

Yeah, thank you for the question. Both, performance of both companies is important for the future steps of the unlocking value process.

The certainly the building, the movement in Sigma's results are very, very helpful. And regarding Alpek, even though we have a decline in results, as we mentioned, and was extensively discussed in Alpek's conference call.

The position of Alpek continues to be very strong. A net leverage of Alpek is 1.8 times is So we still have a confidence that I going forward, both Alpek and Sigma think will help us to support the next steps regarding the unlocking the unlocking value.

But perhaps, just maybe I wasn't specific enough. I was referring a little bit on the Alpek site, obviously, you all, we all want to do well, but I mean, from a tax perspective, the timing that does that influence at all, how you think of the next steps?

Yeah, regarding taxes, the stock price is one important a factor. Depending on what the steps are the certainly many any kind of a spin-off the stock price is important regarding the tax impact.

So, the adoption of the high-tech stock price is has implications on a Broadway's a we want Alpek to drive and both into stock price which will help or valuation but on the other hand, certainly, it has an impact on the tax implications.

Thank you. And just one last one here.

And this may be for Carlos. Just wanted to get your thoughts on these series of reforms that are in currently in discussion in Congrats.

Just wanted to see whether you see any, any potential impacts on your side. And perhaps on the labor side, I mean, this might be more for Sigma, but just wanted to see whether you see your business or, higher cost or any disruptions from the labor bill as well.

And if you can comment on the others, if you see any impact that would be useful as well.

As you probably know, there's a lot of movement around the Mexican Congress. The number of laws and regulations that are being amended or enacted, because some of them are going to be new regulations and new laws.

It's important they are having what they will have a potential impact on the Mexican economy. Regarding Alfa, the one that we believe was the most significant, it's something that is quite new.

We have not made an initial estimate of the economic impact and probably one that you refer to. During the last part of your question, which is the change expected to be approved on the number of hours or days that may be workable, within a week.

They are being proposed to be reduced by one, so the present law says that for every six days of work, you have a right to wait for the seven one. And the proposal is to have five workable days a week to have rights.

As, the change means a change of the constitution. So, the process is going to be complex, you need two-thirds of the two chambers, and then you need the majority of the state conferences.

So, we expect that discussion will start back in September when the ordinary term entails. And it will be competing for attention with the deputies and the senators with the whole economic package of the fiscal package.

Budget and income tax laws and the like. So, it's mostly political, at least, that's my reading.

But there's also next year, there will be elections. So, political arguments and the weight that will be given to this legislation is going to be significant.

Other than that, we don't expect to have any material impact on our businesses, or operations.

Thank you, very much. Thank you, for taking my question.

Essentially, my question is almost identical. So, to that of Roberto, so, I just tried to change it a little bit.

I was going to ask if you know to what degree it was becoming easier to do the OpEx spin off as the stock price comes down. Can you provide an either color on the level of the stock price, which you think would be sort of a level that will materially improve the ability to spin it off and also if we can look at the book value of equity as a proxy for to in order to try to make estimations or estimates on when you would be able to do that?

Thank you very much for taking the question.

Sure Nikolaj. And thanks for the question.

As you probably know, any enough, a Mexico a significantly need to consider to be like a sale of assets. And therefore, it implies the tax payments, the corresponding to a transaction of that type.

We do not have an specific level of a stock price to determine the loss of Alpek fully or partially, but from it's one of the factors that we take into consideration for the next steps that. and the reason to that really have to make sure that every one of the parts of Alfa was the consolidated level, as well as each one of these subsidiaries in maintains a strong financial position before we do anything.

So, if no one results nonstick, it may a lower stock price. But on the other hand, a lower result provides less flexibility model for Alpek to support a Alfa, Alpek debt adoption and diseases females.

So, it has to be a balance. I don't think we can drive the next steps just by one of the factors.

Having said that, it is difficult to have a proxy of just one of the variables.

Great, thank you, Sherry. So, there is one additional question coming in on our webcast from Andres Corona [ph] with Citi and Andres question is related to the potential that can dividend payment and whether that is subject to Alpek distributing an extraordinary dividend level?

Let me begin by repealing that, Alfa intend to make a second dividend payment this year. Our board will determine the possibility of an eventual dividend payment as part of the regular capital allocation analysis that they do during the year.

If the second payment depends on Alpek paying themselves an extraordinary fee, then I would say that not exclusively, a search only display out of Alfa depends on the results going forward, which are affected by Alpek results and the long-term ability of a being able to take, you can do this. It is an important factor but I will say I wouldn't say that the only elements that we will take into consideration that the board will take into consideration in order to define the future dividend payment.

We'll see much improvement in results a very careful regarding cash flow and the financial position of Alfa at the consolidated level also and those are again also important facts.

There is another question on ALFA related to share buybacks, but our view on share buybacks at this time?

That's something that we analyze on a continuous form. As you recall, we did significant buybacks in the past.

Going forward, you will be an opportunistic topic regarding depending on the share price. We will have a level continue to follow a balanced capital approach, which may include share buybacks, but also, we will continue considering as I mentioned the secondary the payment as well as debt reduction of the holding company.

It was all in terms of questions from our webcast. So, we can move on and take questions on Sigma.

Roberto Olivares, Sigma's CFO will answer your questions. Sherry, can you please take questions on Sigma?

Just wanted to get out here some clarification? Can you talk a little bit about how you're seeing I was very surprised at the strong volume that you had in Mexico?

Just wanted to see what do you think is driving these and how sustainable you think consumption has been? I mean, we're going into an electoral year and whatnot.

But just wanted to see fundamentally how do you see consumption in Mexico going forward, if you can provide granular granularity as to where do you see growth? [indiscernible] thank you.

If we see volume in Mexico, volume increased around 6%. And about half of that actually come from foodservice we have seen has very strong foodservice demand as tourism continues to increase in the country, auto occupancy and also in the cities.

Also, we saw very segment growing particularly in the retail that has been going very good in the quarter. And I will say the traditional channel, although is growing is not growing as high as a retail.

Thank you, Sherry. So, we do have a couple coming in via the webcast.

So, the first one Roberto is on how Sigma plans to refinance the €600 million bond that is due in 2024.

Okay, thank you, Hernan. So, during the third quarter of 2022, we need to get it the refinance with by securing for committed baseline that will be used to refinance the €600 million in 2024 bond and their resources are expected to be dispersed and utilize to redeem them on within a three-month period prior to the scale maturity.

So that will be between November and February, between November of this year and February of the next one.

Thank you. The next question is related to Europe.

When would you expect better EBITDA for the European operations?

Sure, thanks. So, we're gradually improving results to pricing actions.

As you saw in my initial remarks, pricing in Europe increase 29% versus same quarter last year, and also cost and expense reduction. I think significant portion of the EBITDA grow in 2023 that we have in our guidance is expected to come from Europe, as the actions on their way are reflected.

Keep in mind that particularly is the cost meet cost in the first quarter continues to increase. And as we are increasing prices in Europe, it takes some time to be reflected.

So, whenever the inflationary pressure eases and we catch up with price, results will benefit and we will recover the previous margin levels.

Thank you. The next question is related to guidance and how comfortable you feel with full year guidance after a strong first quarter?

So, we are confident about reaching the guidance. I will say we're while we are encouraged by the strong first quarter result.

I think it's too early to call the rest of the year. We prefer to take a conservative approach as we're monitoring potential changes in effects in raw material and in consumer demands as well.

And I think that the next question Roberto is somewhat related to this, and it has to do with the pesos if there's any way in which the strong pesos has changed the Sigma strategy in Mexico.

I think. In general, the peso affects the Mexican operation two ways.

The first one is most of our raw materials come from the U.S. is payable in U.S.

dollar. So, stronger peso helped us to have lower raw material cost does benefit or our margin and also the conversion effects.

So, the Mexican operation and EBITDA is actually Mexican pesos and we have a compression effect that deals to stronger result in U.S. dollars.

And final question related to pricing, you expect to continue seeing pricing actions in the region going forward?

I think, but it will depend on the regions particularly for the case of Europe, as we are seeing cost continues to increase particularly need. We will definitely continue with our targeted pricing actions in order to mitigate the impact on margin.

In the case of the U.S., there's still some pricing opportunity particularly to offset some pressures on labor, packaging and other raw material costs. And I would say for the rest of the reuse it will depend particularly in how the raw material behaves going forward.

As we are seeing today in that particularly some raw material in the Americas, Turkey to be specific hasn't started to retreat this year. Those also benefiting the margin.

I just want to mention that we take a careful approach to balance price and volume. Because we want to whatever we do in terms of pricing actually helps in the long-term that the results of the company.

Absolutely. Go ahead.

Most of them have already been answered. But you were talking about guidance.

And my question is that has something changed in terms of operations, in terms of the market, because it seems that most of the outperformance during the quarter is to your guidance is related to FX, your guidance you have an embedded 20 pesos and we have 18 pesos? That's my first question.

And the other one is on your plan base, your growth business unit. What can you tell us how is this unit contributing to growth this quarter and how are you seeing these units continuing to grow this year?

Thank you.

Thank you, Alexandra. So, first question related to guidance, I will say besides the fact effect that that you already mentioned that the 20% versus the 18 pesos per dollar that we have, also, we are seeing particularly in the Americas, a better raw material environment that we expected when we created the guidance in particularly again, in Turkey.

On the other side, we have a worst raw material environment in Europe, particularly in pork, because of lower availability of pork, given that pork producers have been losing money for the last two years. In those they're reducing the supply impacting prices.

So, we have those two effects I will say also volume has remained solid in almost all regions and that has also helped with regards to the result. Maybe move to the second one about growth of both business unit and plant base and snacking in we right now, sales of both plant base and snacking represent close to 3% of the sales of the group the numbers are still is still low, but increasing significantly quarter by quarter is also our e-commerce platform and the rest of the new business models that we are piloting has been performing very well and in line with our expectations.

But the particularly for plant based we are right now moving from a pilot into and a scale phase, we have already producing our most of the books in our plants, getting more clients. Having a broader portfolio that helps us not only capture more clients but also have a bigger presence in the child and that is helping us to promote our brand which is for example in Spain.

Our hot dogs are plant based hot dogs is the number one plant based in Spain. And that has happened in just a few months is the lounge.

One more, if I may. And, I'm seeing a lot of questions on Europe and the recovery.

Europe for you guys has been a really tough nut to crack since the acquisition. Have you guys analyzed divesting these in this operation entirely and focusing on Mexico, United States and Latam which have been, great businesses and shown great growth over the last decades.

Sure. So, thank you, Alexandra.

I think what is currently happening in Europe is very importantly what we see it as a temporary effect of temporal factor now temporarily effective, it has been for the day except and then they, I would say the impact of the Russia-Ukraine conflict. And we see that that this will be temporarily and once the inflation eases we will be able to recover or pre-complex margin levels and then work to achieve our target.

As of right now we're not considering exiting Europe. And we will continue to operate as efficiently as possible, doesn't have a very clear strategy on Europe based on three levers.

And our target is to reach a double-digit in EBITDA, we still think that, although it will probably take us more time. We can reach that based on the strategy.

We want to very, very fast, one optimizer footprint. We're working on that we have already done a couple of strategic moves.

And we will continue doing more of these efforts. We have been working on identifying the highest potential opportunities that we would have in each country and tackle them.

And third one is related to our European heritage portfolio that we have the opportunity to sell in different countries with high margins for particularly China, Japan, the U.S. and UK.

So, we're working on those three levers. And with the price index structure that we have with the customer extensive initiatives that we're doing, we think we can reach our target in the near future.

Thank you, Sherry. There are no records or question for Sigma.

So, let's not move forward and take questions from Alpek and Axtel. We have Jose Carlos Pons, Alpek's CFO and Adrian de los Santos, Axtel's CFO.

So, could you please prompt for questions on Alpek’s and Axtel?

In the meantime, there is one question for Axtel coming in through the webcast. So, it is related to Axtel refinancing plan.

Again, could you elaborate a little bit more on that topic?

Yes. Good afternoon, everyone.

During the quarter, Axtel obtain commitments to participate in the syndicated loan from additional banks, additional participants than what we had in previous reports or previous conference calls. We also made progress in conversations with development banks.

That's part of the comprehensive liability management transaction that Axtel wants to put in place. And there is also a question about what's the estimated cost of potential new financing.

We're looking at variable rate loans that will range from 2.5 to 3.5 more or less, depending on our net leverage ratio. That's the sort of costs that potential bank financing will be for 4x10 today.

Any questions coming in from the line Sherry?

Well, in that case, we'd like to thank very much everyone for their interest in Alfa. And also, if you have any additional questions, please feel free to reach out to us.

We will be pleased to assist you. Thank you very much for joining us today and have a great day.