• Consolidated EBITDA Growth: Double-digit growth in Q2 and first half of 2024.

• Alpek Comparable EBITDA: $312 million, on track for full-year guidance.

• Alpek Volume Increase: 2% increase in the first half of the year.

• Alpek Annualized Savings: $75 million from cost reduction initiatives.

• Alpek Leverage Ratio: Improved to 3.3x at the end of Q2 2024.

• Sigma Revenue Growth: 13th consecutive quarter of year-on-year growth.

• Sigma Quarterly EBITDA: Achieved an all-time high.

• Sigma Full-Year Revenue Guidance: Revised to $8.85 billion.

• Sigma Full-Year EBITDA Guidance: Revised to $1.0 billion.

• Sigma Net Leverage Ratio: Improved to 2x, the lowest in nearly 11 years.

• Consolidated EBITDA Guidance: Increased 5% to $1.59 billion.

• Consolidated Revenue Guidance: Adjusted up 1% to $16.78 billion.

• Consolidated Net Debt (Excluding Alpek): $3.25 billion at the end of Q2 2024.

• Warning! GuruFocus has detected 6 Warning Signs with ALFFF.

Release Date: July 25, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Alfa SAB de CV (ALFFF) reported better than expected results, with double-digit EBITDA growth in the second quarter and first half of the year.

• Sigma achieved an all-time high quarterly EBITDA, marking its 13th consecutive quarter of year-on-year revenue growth.

• Alpek completed a comprehensive plan to capture $75 million in annualized savings, improving its leverage ratio to 3.3x.

• Sigma's performance was bolstered by strong consumer demand and favorable currency exchange rates, particularly in Mexico, the US, and Latin America.

• The company raised its 2024 guidance, anticipating full-year revenues of $8.85 billion and EBITDA of $1.0 billion, reflecting a 2% and 9% increase, respectively, over original projections.

Negative Points

• Alpek continues to face headwinds in the global petrochemical industry, with polyester margins still under pressure.

• Despite strong performance, Alfa SAB de CV (ALFFF) faces a significant discount in its stock price, with Sigma's implied value within Alfa being undervalued.

• The company needs to reduce its consolidated net debt from $3.25 billion to closer to $2.5 billion to maintain a healthy leverage level post-separation.

• There is ongoing pressure from raw material costs and currency volatility, which could impact margins in the second half of the year.

• Alpek's guidance already considers low levels of polyester margins, indicating ongoing challenges in the market.

Q & A Highlights

Q: Can you discuss the options for non-core asset sales or divestments at Sigma to unlock value? A: Eduardo Alberto Escalante Castillo, Chief Financial Officer, explained that Alfa is committed to completing the separation process while maintaining a solid financial position for both Alpek and Sigma. The goal is to reduce debt to around $2.5 billion to achieve a healthy leverage level. Various options, including real estate and non-core asset monetization, are being considered, but specific details are not yet available.

Q: What are your thoughts on profitability in the US given the volatility in protein prices? A: Robert Olivares, Chief Financial Officer of Sigma, noted that while there are pressures from raw material costs, Sigma has initiated revenue management strategies to protect margins. Seasonal factors also affect profitability, with higher sales of lower-margin products like hot dogs during the barbecue season.

Q: Can you provide insights into Sigma's record margins in Mexico and any capacity constraints? A: Robert Olivares highlighted that Sigma's margins in Mexico benefit from a favorable product mix, including value-added yogurt. While some categories are nearing capacity, Sigma is exploring co-packing and capacity expansion projects to meet demand. There is potential for margin improvement with increased volume, though raw material costs and FX volatility could impact margins.

Q: What are the targeted margins for Sigma's European operations post-restructuring? A: Robert Olivares stated that Sigma aims to recover pre-conflict margin levels in Europe within 18 months, targeting a margin between 4% and 5% by year-end. The focus is on consistent improvement and leveraging restructuring efforts to enhance profitability.

Q: How does Alpek view the risk to polyester margins given weak consumption in China? A: Eduardo Alberto Escalante Castillo explained that current polyester margins already reflect China's situation, and Alpek's guidance accounts for low margin levels. Protective measures like anti-dumping duties in key markets and logistical challenges help mitigate risks. Capacity rationalization in China may also lead to more sustainable market conditions.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.