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Edited Transcript of ALFAA.MX earnings conference call or presentation 18-Jul-19 5:00pm GMT

Q2 2019 Alfa SAB de CV Earnings Call

Monterrey Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Alfa SAB de CV earnings conference call or presentation Thursday, July 18, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo Alberto Escalante Castillo

Alfa, S. A. B. de C. V. - CFO

* Hernan F. Lozano

ALPEK, S.A.B. de C.V. - Former IR Officer

* José Carlos Pons De La Garza

ALPEK, S.A.B. de C.V. - CFO

* Roberto Olivares

Alfa, S. A. B. de C. V. - CFO of Sigma

* Rodolfo Gamboa

Newpek, S.A - SVP of Oil & Gas

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Conference Call Participants

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* Alejandra Obregon Martinez

Morgan Stanley, Research Division - Research Associate

* Alejandro Chavelas

Actinver Casa de Bolsa, S.A. de C.V., Research Division - Analyst

* Alejandro Azar Wabi

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Christian C. Landi

Scotiabank Global Banking and Markets, Research Division - Deputy Director of Metals and Mining & Analyst

* Eduardo Altamirano

HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate

* Gilberto Garcia

Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst

* Héctor Manuel Maya López

Santander Investment Securities Inc., Research Division - Research Analyst

* Mauricio Serna Vega

UBS Investment Bank, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to ALFA's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. Now I would like to turn the conference over to Mr. Hernan Lozano, Vice President of Corporate Communications. Thank you, Mr. Lozano, you may begin.

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Hernan F. Lozano, ALPEK, S.A.B. de C.V. - Former IR Officer [2]

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Thank you. Good afternoon, everyone, and welcome to ALFA's Second Quarter 2019 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, which we hope will serve as a useful reference to complement today's call.

Both documents are available on our website in the Investor Relations section. As a reminder, during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. Therefore, actual results could vary materially, and the company cautions not to rely unduly on these forward-looking statements.

This call will be divided into 2 parts. First, Eduardo Escalante, our CFO will discuss ALFA's consolidated financial results and provide key highlights for the individual business.

Afterwards, we will have a Q&A session where we will take all your questions together with the CFOs from each business.

I'll now turn the call over to Eduardo.

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Eduardo Alberto Escalante Castillo, Alfa, S. A. B. de C. V. - CFO [3]

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Thank you, Hernan. Good afternoon, everyone, and thank you for joining the call today. Consolidated second quarter results reflect underlying operating and financial performance that was in line or better-than-expected in all of our subsidiaries even as some of them faced unexpected headwinds. This was particularly the case for Alpek and Sigma, which were subject to unfavorable raw price material conditions during the quarter.

Consolidated 2Q '19 revenue of $4.5 billion was 8% lower than the previous year, primarily due to the effect of lower feedstock prices in Alpek and lower volume in Nemak, which offset revenue growth in Sigma.

We were pleased to see solid EBITDA improvement versus 1Q '19 in most businesses. Reported 2Q '19 EBITDA of $595 million was down 12% year-on-year and up 15% quarter-on-quarter.

Similarly, when adjusting for extraordinary items, comparable 2Q '19 EBITDA was down 12% year-on-year, and up 9% when compared to the previous quarter.

In addition to the sequential improvement in operating and financial results, value-enhancing initiatives at the subsidiary level continue to move forward.

Axtel completed the sale of its Mass Market business, advancing the process to monetize its data centers located in Monterrey and Queretaro through a partnership and continued the process to divide its operation into 2 specialized business units.

Looking back, the Mass Market business sale reaffirms our positive view on Axtel's shareholder value potential.

In summary, this was a $300 million transaction, valued at more than 7.5x EBITDA which represents a significant premium versus Axtel's average EBITDA -- EBITDA multiple of close to 4.5x year-to-date.

Additionally, Alpek is on track to close the $800 million sale of its 2 cogeneration power plants to ContourGlobal in the coming months. Although with the divestment of noncore assets is twofold, on the one hand, continuous strengthening our balance sheet and on the other, maximize our return on invested capital.

Regarding our balance sheet, consolidated net debt was down quarter-on-quarter, supported by sequential EBITDA improvement across our businesses and a recovery in net working capital.

ALFA maintains its solid financial position with consolidated net debt-to-EBITDA of 2.7x compared with 3.1 and 2.6x in 2Q '18 and 1Q '19, respectively.

We expect to further reduce debt by year-end, supported by our strong cash flow generation, together with proceed from the sale of noncore assets as mentioned earlier.

Moving on now on to a brief overview of the individual business. As a reminder, more detailed financial information on the quarter for Alpek, Nemak and Axtel was provided by each of them during their respective conference calls held earlier today. Starting with Alpek. The company rebounded in 2Q and reported solid results even in the face of declining feedstock prices. The underlying business was supported by better-than-expected reference polyester and polypropylene market.

The following are some key highlights for Alpek's business segment. Starting with polyester, Asian reference margins have consistently remained above expectations in the first half of 2019.

However, on the feedstock front, we saw an unusual disconnect in 2Q '19 between the price of Brent crude oil, which increased 8% versus 1Q '19, and the price of paraxylene, which decreased 14% over the same period and the new paraxylene capacity coming online in China.

Despite these unfavorable feedstock price environment, comparable polyester EBITDA rebounded 47% versus 1Q '19.

Alpek's Plastics & Chemicals segment posted better-than-expected results as solid performance in polypropylene and expandable polystyrene has more than offset weak caprolactam effects.

On the strategic development front, commissioning work on the Altamira cogeneration power plant is almost complete, as Alpek finalizes the plant startup process in anticipation of closing the sale in the coming months.

Next, Sigma. We are pleased with Sigma's 2Q performance as the quarter began with the company facing the challenge of the African swine fever in China and its associated effects on global pork prices.

Notwithstanding this, the company was able to deliver EBITDA growth in 2Q '19 driven by margin expansions in Mexico, in the U.S., and Latin America.

On the macro front, key raw material prices were up in all regions with pork prices notably higher due to the swine fever.

Sigma has actively engaged on several fronts to mitigate the impact of higher pork prices on its business, including price adjustments, reformulation, inventory management and most recently, hedging.

It was encouraging to see U.S. pork prices decrease in June. Yet we acknowledge that the risk of further volatility remains while Chinese pork production recovers.

Sigma will continue to work diligently to manage this situation in the coming quarter. During 2Q '19, total revenue was up 1% or 3% on a currency-neutral basis versus 2Q '18, while EBITDA increased 7%, a double-digit growth in Mexico, the U.S., and Latin America. It was partially offset by a 40% decrease in Europe.

Higher pork prices due to ASF, the temporary lag between cost and price increases across the region and the weaker euro against the dollar, impacted Europe EBITDA in 2Q '19.

As part of a much broader operating efficiency effort in Europe, Sigma completed the closure of one of its 2 production facilities in the Netherlands during the second quarter.

Volume from the closed plant is being absorbed by larger and more efficient facilities in the region.

Now on to Nemak. As anticipated, industry headwinds affected demand for Nemak products. In turn, volume was down 15% versus 2Q '18. However, results were in line with expectations supported by operating efficiencies achieved at the plant level.

By region, North America reported lower revenue due to lower volumes and aluminum prices where our EBITDA decreased as a result of lower volume and higher expenses on new product launches.

In Europe, lower revenue and EBITDA reflect lower volume as well as FX, which were partially offset by efficiencies.

It is important to note that 2Q '18 was a tough comparison as OEM customers saw higher light vehicle sales ahead of the change to new emissions standard testing, which were implemented later in 2018.

Rest of the world saw lower revenues primarily due to lower sales in China, while EBITDA benefited from another growing gain related to the favorable resolution of a tax dispute in Brazil.

On the financial front, Nemak's revenue was down 18% year-over-year reflecting the lower volume and aluminum prices as well as the weaker euro against the dollar. 2Q '19 EBITDA was down 20% when adjusted for extraordinary items, primarily due to lower volume.

However, as a result of ongoing operating efficiencies, EBITDA per unit -- per equivalent unit was down only 2%.

Nemak recently announced its plans to close its small manufacturing facility in Canada by mid-2020, as it continues with efforts to improve capacity utilization and rationalized costs.

This facility accounts for approximately 1% of Nemak's sales. On a positive note, Nemak has signed new contracts year-to-date worth a total of $410 million in annual revenues, of which approximately 40% represent incremental business. Also Nemak recently initiated test production for the first plant in North America dedicated to electric vehicle battery applications.

Moving on to Axtel. The company has been in transition out of the Mass Market business and selectively monetizing certain infrastructure assets to focus on its core enterprise and government segment, while at the same time, driving operating efficiencies.

As a result, throughout the year, the company has consistently delivered better-than-expected EBITDA. On a reported basis, top line growth has its low reflecting the sale of the Mass Market business completed in the second quarter of this year. On a comparable basis, revenue was down 1%, as the government segment has been weaker this year, reflecting the change in government, which typically results in a temporary slowdown, while the new administration settles in.

By contrast, the enterprise segment reported higher sales. With respect to value-enhancing initiatives, Axtel remains on track to monetize its data centers, to streamline the business by separating -- by separating it in 2 and further reducing debt.

Lastly, Newpek. There has been no additional gain in neither the U.S. or Mexico. In turn, production was down year-over-year, reflecting both the recent asset sales in U.S. and the natural decline in oil wells productivity.

Total revenue was down due to lower production and lower oil price. The company has also been reporting EBITDA losses due to the same factors. Encouragingly, the second quarter EBITDA loss was smaller than 1Q '19.

A recent development is that Newpek now has a new working partner in the Eagle Ford Shale and South Texas as Pioneer Natural Resources company sold its stake to Ensign Natural Resources, LLC. We look forward to working with Ensign to maximize the value of our working interest while we continue to seek an attractive opportunity to monetize Newpek's U.S. assets.

This ends my discussion about the individual businesses.

In summary, the businesses all performed in line or ahead of our expectations and are on track to meet the full year EBITDA guidance we provided early in the year.

As a result, we are maintaining our 2019 guidance. On a consolidated basis, EBITDA is projected at $2.4 billion. This concludes our discussion of second quarter results. We will now take your questions. Hernan?

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Hernan F. Lozano, ALPEK, S.A.B. de C.V. - Former IR Officer [4]

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Sure. We would like to begin the Q&A session with questions on ALFA. Eduardo will take questions on ALFA or corporate matters. Operator, please instruct participants to queue for questions on ALFA.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mauricio Serna with UBS.

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Mauricio Serna Vega, UBS Investment Bank, Research Division - Analyst [2]

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Just wanted to check couple of things, given that you've maintained guidance for the full year EBITDA, I mean, it still implies a decline. So we were just wondering if you all believe you will remain or your net debt-to-EBITDA ratio should remain within your target for this year. And then next, just wanted to know how is the capital allocation looking for this year. I know you've announced dividends, but also wanted to know if there's some buyback activity going on given the stock's performance.

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Eduardo Alberto Escalante Castillo, Alfa, S. A. B. de C. V. - CFO [3]

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Sure, sure Mauricio. Thank you for your questions. Regarding the guidance, as mentioned, we do expect to achieve the full year guidance on EBITDA for the year. Having said that, we do -- we are maintaining our improvement in the net debt-to-EBITDA leverage ratio for the end of the year, since not only we are maintaining the EBITDA level, at the expected level, but also we are planning on finalizing both monetizing the noncore asset opportunities that we have for the rest of the year. The cogen sale at Alpek and also the monetization of the data centers at Axtel. So we do expect to see an improvement in terms of the net leverage ratio by the end of the year.

Regarding capital allocation, we will continue with the strategic planning process that we have in place where we do bottoms-up capital allocation depending on each one of the businesses. The businesses themselves identify the opportunities they have in their respective industries and that goes through all the way to the corporate level. In the case of ALFA, at the holding level, we do not plan to invest in any -- as we have said before, we do not plan to invest in any new businesses or expand our exposure at that level.

Regarding dividends. We do plan -- we announced $202 million dividend payments to our shareholders at ALFA. We already paid half of it, and we will be paying the second portion of that amount in September -- in September of this year. And I think that was it. Oh, buyback, yes. Regarding the stock price and ALFA's share buyback program, certainly we think ALFA is trading at a very large discount. In our opinion we are having an unreasonable conglomerate discount versus some of the parts when you add all of our value -- the value of each one of our businesses. Of course, we are being affected by pressures to the equity markets in Mexico and in emerging markets. But further than that, we still -- we have very strong business fundamentals that do not justify the large discount that we're having today.

In order to improve our stock price and bring value to our shareholders, as we have mentioned before, we first plan to strengthen our balance sheet and increase our return on invested capital via global result as well as the noncore asset divestment. We are -- I can tell you, again, and reaffirm that we are fully committed to our investment-grade ratings and we'll maintain as I mentioned before our disciplined capital allocation. Having said that, the priority is to achieve a stable net leverage ratio below 2.5x prior to exercising a significant share buyback program. When we feel we are in a much more solid position and we have room to do a share buyback program, we will certainly consider doing it.

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Mauricio Serna Vega, UBS Investment Bank, Research Division - Analyst [4]

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Just I guess a follow-up on the returns on invested capital. I mean it seems that after -- I mean operational results for this year would not be supportive for an inflection in returns. So I mean how much more can you do regarding the non-core asset sales after the Alpek and what's left on -- what's left on Axtel and Newpek, there doesn't seem to be much more room for that kind of monetization now.

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Eduardo Alberto Escalante Castillo, Alfa, S. A. B. de C. V. - CFO [5]

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Well, if you look at the amounts that we are expecting from those transactions, those are very significant amounts between both -- between those transactions we expect to receive somewhere in the order of about $950 million, which is a significant portion of our net debt. The target we have on return on invested capital is to be at or above our cost of capital. For 2018, the return on invested capital for ALFA was 10.1%, which is pretty much at the level of our cost of capital, and we can maintain that for this year when we take into consideration those extraordinary items.

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Operator [6]

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Our next question comes from Eduardo Altamirano with HSBC.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [7]

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Just furthering a little bit on to Mauricio's questions, in terms of the capital allocation strategy, is there any consideration that, let's say, where when you do achieve let's say that 2.5x net debt-to-EBITDA target that you would buyback certain positions in some of your underlying let's say, subco's? And the reason I ask this is because if you look at it from a long-term normalized earnings base, those businesses as well are trading at a discount. So it is not just ALFA that trades at a discount rate, some of the parts, let's say from a longer-term business perspective those do look fairly attractive and is there any possibility of doing so? And then, again, furthering on to the dividends portion, with the buybacks you've done, any sort of consideration of let's say a potential long-term dissolution where basically given those tax-efficient way of doing so for shareholders rather than incurring a significant tax impact from the potential dissolution of ALFA let's say further on down the line?

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Eduardo Alberto Escalante Castillo, Alfa, S. A. B. de C. V. - CFO [8]

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Thank you, Eduardo for the questions. Regarding the return on invested capital and the capital allocation that we do in ALFA, I think, it's important to notice that all the divestments that we are considering imply a small reduction in EBITDA. If you look at the cogen asset sale, one is the big facilities and the new one, so it is not generating EBITDA today for Alpek. So we are losing a very small EBITDA compared with the amounts that we are getting. So those transactions will certainly help in terms of the return on invested capital numbers for the companies themselves and for ALFA. And if you look at Axtel, Axtel is -- if you look at the size of Axtel's operations and value compared with the expected proceeds from the data centers, again, the same effect is happening. So we think it is the right track. We continue looking across all of our businesses for noncore assets that can bring a higher value to our shareholders, if we monetize them.

The policy of capital allocation, again, we do it company by company, it is a bottoms-up process and we plan to continue doing so.

Regarding the dissolution of the company and the dividends, again, the priority is to focus on strengthening the balance sheet first through a reduction in debt and achieving a 2.5 net leverage ratio, below 2.5x on a consolidated level, and being particularly keen on the specific level for each one of the businesses, each one has a different threshold that we want to maintain, the 2.5 is not in general for every one of the businesses.

Today, we are not looking at any other options, as I mentioned before regarding the buyback program or dissolution of ALFA or anything like that. After we are able to achieve the stable level that we are targeting, we will certainly look at options.

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Operator [9]

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No further questions at this time.

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Hernan F. Lozano, ALPEK, S.A.B. de C.V. - Former IR Officer [10]

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So now we will take questions on Sigma. Roberto Olivares, Sigma's CFO will answer your questions. Operator, please prompt for questions on Sigma.

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Operator [11]

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(Operator Instructions) Our first question comes from Christian Landi with Scotiabank.

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Christian C. Landi, Scotiabank Global Banking and Markets, Research Division - Deputy Director of Metals and Mining & Analyst [12]

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We read that for Sigma there was a closure of a production facility in the Netherlands, and I remember that -- and you were expecting to open Burgos, to ramp Burgos up, the idea was to consolidate volume in Europe in that big facility. I was wondering if there are any plans for further shutdowns of further facilities and what could be the potential benefit in margins for Sigma?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [13]

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Christian, thank you so much for your questions. So regarding our capacity utilization break in Europe, we do see that is below the average of the company -- of the rest of the company, and we are analyzing different options and scenarios to optimize this. The idea is to eventually do something like that, the potential increase in margins, it will depend on the plan that we are analyzing, right now, it is too soon to tell, we would probably present something soon.

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Operator [14]

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Our next question comes from Alejandra Obregon with Morgan Stanley.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [15]

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So my question is related to the Mexico business. I was just wondering if you could guide us through the drivers for the 15% margin delivered during the quarter. So meaning, how much of this was due to the lifting of tariffs, how much was pricing particularly and I would also imagine there's some sort of IFRS 16 impact here.

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [16]

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Sure. Thank you, Alejandra. What I can tell you is that most of the benefit comes from margin contribution. So we did increase prices, you may remember we started increasing prices in summer of last year when the tariff was imposed for the U.S. pork ham and then we again increased prices during April due to ASF. So 2 price increases in 1 year has helped us achieve a better margin. IFRS 16 is something is not that as relevant. We do not disclose that figure by region, but it's not as relevant as this price increase is.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [17]

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Understood. And then a follow-up if I may. At this time on the U.S., you mentioned, I think, it's in the whole Americas business, you mentioned that there was a sudden steep decline in pork ham prices by the end of the quarter. So just trying to understand how big and whether this is something that you're expecting in the long run and what's the driver?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [18]

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I think -- I mean, we have seen a lot of volatility in the market regarding ASF since March. Let me put you an example, in the Americas, the pork price in the Americas reached high-level during May. There were trading for ham around $0.85 per pound, which represented around a 50% increase versus last year.

However, prices in June started to decrease and positioning at prices around 60% -- $0.60 per pound, which was only an increase of 10%. So there's a lot of volatility in the market, what we have -- I mean, we have seen and heard mixed signals about this on the positive side, I mean, production is growing globally, U.S., Europe and Latin America are growing their production because China, what we have heard is, has told everyone that they will eventually start buying. So everyone is putting more porks into the system and that has helped enough to keep prices down a little bit. On the other side, information coming from China is not very clear. The outbreak effects and the potential increase that it could have -- the potential impact it could have on the production is not very clear. So that has put in a lot of noise in the market. So that's why prices are fluctuating a lot. Going forward what we expect is that they will continue to be very volatile. We see at least prices being in these levels for the rest of the year and potentially increasing by the end of the year.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [19]

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Understood. And maybe just a final question, if I may, which is say about ASF impacts are only being seen in Europe at this stage and that we could still see some further effects back-end loaded for the U.S. and/or rest of your business?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [20]

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So the markets in Europe and the U.S., the pork markets have not performed equally, to say that. In Europe, we have seen the pork price increases and they had stayed at that. In the case of the U.S. I already explained, it has looked a better lot. It also took some more time to increase prices in Europe that's why we do see an impact on the results. To give you an example, usually, I mean, we presented new price listing in Europe at the end of April and the beginning of May, and we did not see those price being implemented until mid-June. And we still are going to see some price during this third quarter. And in the case of the Americas, prices were implemented faster. We moved a little bit more faster on that side, but we're taking all the actions in order to mitigate the possible impact in all the regions and let me put an example, we started a hedging program to hedge our pork needs for the winter and the coming spring. So we will have that extra, let's say, action in order to mitigate the possible effects going forward.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [21]

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Right. How much of your total input has been hedged at this stage?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [22]

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At this moment, around 30% of earnings. We will continue to evaluate in doing more.

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Operator [23]

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Our next question comes from Héctor Maya with Santander Bank.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [24]

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I just wanted to know, there have been discussions that the pork inventories in China could deplete by September. I wanted to know if you are seeing something related to this. Or do you agree with that kind of time line? And how you are moving on that, I mean, I see that you're having future contracts mature from November 2019 to April 2020. Just wanted to know how else are you going to keep managing this if this long-term related.

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [25]

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Thank you, Héctor, for your questions. So the information coming from China is, as I mentioned, is not very clear. We have heard that as well. But again, as I mentioned, global pork production in the other regions other than China and Southeast Asia is growing. So U.S., Europe, and Latin America, they are now producing more pork. So that is -- that will eventually help in this matter, and let me add to that, not only pork, also all the other protein and the whole protein complex, so poultry and beef. So that could potentially help to keep prices low. I mean, we are evaluating to increase our hedging program more and to do this as a rolling program, so to hedge -- to continue hedging through 2020. We are also working on building up inventory to have enough inventory of what we can consume of frozen meat, right now we have enough inventory for the rest of the year of what we can consume of frozen meat. And also we are doing all the other actions that we have mentioned in the past. We have been doing reformulation, negotiating more with suppliers, and do other actions to offset the possible effect.

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Operator [26]

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Our next question comes from Gilberto Garcia with Barclays.

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Gilberto Garcia, Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst [27]

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I also had a question on pork prices. It is a follow-up to the previous question. So we have seen the most recent export data showing significant increase in exports from the U.S. and Europe to China. How has this been impacting your purchases? And how are you seeing things with all this volatility?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [28]

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Thank you, Gilberto. In the case of exports, let me put it up by region, let me first start with Europe. We do have seen an increase of exports from Europe to China. Right now it has not been as high as we were expecting at the beginning. Again, China does not buy as much from the outside. There is still, again, normal information about what is happening in China specifically about demand. We think China's pork demand is shifting a little bit to other proteins. And talking about the U.S., right now, because of the trade war between the U.S. and China, specifically through that we have not seen a lot of exports going to China from the U.S. Right now, China has 60% tariff on U.S. pork, which makes U.S. pork production very, very, very expensive. So unless that changes, we don't see in the near term that is happening. However, we are preparing for that now, so that's why we're doing the hedges, and we're building up inventories and doing all the rest in order to mitigate the effect.

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Gilberto Garcia, Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst [29]

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Just following up on the U.S. The numbers that we are seeing are close to double year-on-year in May. Do you see risk that as trade tensions ease that could be sustained and impacts your margins?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [30]

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Let me see if I understood your question. So if the trade war finishes and now U.S. starts to export products to China what will happen to our margins in the U.S.?

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Gilberto Garcia, Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst [31]

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Yes.

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [32]

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Okay. So I mean, obviously if that happens, we -- I mean, we will see an impact on cost, but that impact, the way we see it, we will be offsetting that with price increases as we have had. I mean, we have already increased prices. Since we haven't seen that raw material cost increase, we were doing some promotions on this, now that we can lift very easy and also I mean, we already implemented the hedging program, and we have enough inventory for the rest of the year and the beginning of the next year. So we don't see impacts on margins very significantly in the U.S.

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Operator [33]

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Our next question comes from Alejandro Azar with GBM.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [34]

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Just a follow-up on the region you mentioned as you were recalling, Europe has been impacted more by the ASF. However, if you can comment on -- if you have seen an impact on lower volumes given you're increasing prices in all your regions?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [35]

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Sure, thank you, Alejandro. So overall sales volume decreased low single digits during the quarter. What I can tell you is it depends on the region, for example, in Mexico, Mexico showed much significant volume due to the timely revenue management implementation that we have. We have been working on revenue management in Mexico since the last few years. So we didn't have -- we didn't see that much of a volume drop, even though we were, here, the first one to move prices. In the case of Europe, we didn't see volume dropping, even though we're trying implementing price increases during this quarter, and it has mainly to do because of higher sales volume from our fresh meat business. For the case of U.S. and Latin America, we also observed low elasticity. Since revenue management is starting to be implemented in that region, we should see lower volume impact in the future. I just wanted to clarify that since this is a situation that is happening to the whole industry, I mean, we're seeing everyone increasing prices. So we shouldn't see some volume drop insignificantly.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [36]

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Yes, actually I would mean if there were volume drops or that because consumers were moving onto other substitutes, but another one is regarding your lag between cost and price increases in Europe. Would you say that margin should stabilize if prices of pork doesn't come -- continue to go up?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [37]

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Yes, as of today, I mean, it has been a difficult year in Europe. And probably, we'll continue to experience some headwind in that region, but I mean -- we are finishing up our planning -- implementation plan or price implementation plan and with that we see that gap closing in the next quarters.

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Operator [38]

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Our next question comes from Mauricio Serna with UBS.

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Mauricio Serna Vega, UBS Investment Bank, Research Division - Analyst [39]

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Just if you could comment a little bit more. I mean you mentioned that in Mexico the driver for the higher margins have pretty much been pricing, so just want to understand also the main driver for U.S. and Latin America. And since you're keeping the full year EBITDA guidance, I would probably assume that you were thinking about maybe a weaker performance from Europe likely to be compensated by stronger performances elsewhere. I just wanted to confirm that?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [40]

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Thank you, Mauricio. About your first question, yes, I mean, in the U.S, pricing also contributed to higher margins. So this higher price offsets the higher raw material costs. And especially in our Hispanic business, which performed very well in the U.S. In Latin America, margins were also benefited by margin expansion and this has a lot to do with higher efficiencies specifically in Peru and Costa Rica. In case of our guidance, we do not plan to change this year's guidance and although as you mentioned, Europe results were not as expected during the first half of the year. The rest of the regions performed very well and more than offset those results. So we think that we will be within range at the end of the year.

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Operator [41]

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Our next question comes from Alejandro Chavelas with Actinver.

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Alejandro Chavelas, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Analyst [42]

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I think most of my questions have been asked. Just on the hedging front, you mentioned 30% of all imports hedged, was that correct? Or just to clarify on that your view?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [43]

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Just pork, Alejandro. Right now, what we have, as of today is 30% of our meat -- of pork for the winter and spring.

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Operator [44]

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Our next question comes from Héctor Maya with Santander Bank.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [45]

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Sorry, just wanted to confirm the 30% that you mentioned is just for Europe or all of your requirements for the consolidated company?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [46]

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That will be for what we can consume in the Americas, in the U.S., in Mexico and Latin America.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [47]

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And for Europe you don't have any of that yet?

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Roberto Olivares, Alfa, S. A. B. de C. V. - CFO of Sigma [48]

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Unfortunately, there is not financial market in Europe for pork. We are evaluating other possibilities.

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Operator [49]

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There are no further questions at this time.

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Hernan F. Lozano, ALPEK, S.A.B. de C.V. - Former IR Officer [50]

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Thank you. Let's move forward and take questions on Newpek. Rodolfo Gamboa, Senior Vice President of Oil and Gas will answer your questions. Operator, please prompt for questions on Newpek.

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Operator [51]

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(Operator Instructions) Our question comes from Alejandra Obregon with Morgan Stanley.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [52]

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So just a small question on Mexico. I think this is like the second big consecutive drop in Mexican producing wells. So just wondering if you could provide us some color there and how should we think of the region going forward?

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Rodolfo Gamboa, Newpek, S.A - SVP of Oil & Gas [53]

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Yes, Alejandra. Thank you for your question. The drop in the number of wells is basically in the Costa Rica area, mainly the San Andrés field and the situation of these wells coming off line is basically the lack of work that we have been doing in the wells. Most of those wells are shut-in, ready for workovers, and we are currently negotiating with Pemex on what kind of work we're going to be doing this year. As you know, Pemex just announced their new plan and with that comes the budget approval and in the end these fields in San Andrés and Tierra Blanca are still service contracts that we have with Pemex and we're subject to that.

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Operator [54]

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There are no further questions at this time.

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Hernan F. Lozano, ALPEK, S.A.B. de C.V. - Former IR Officer [55]

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

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Operator [56]

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(Operator Instructions) A question comes from Héctor Maya with Santander Bank.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [57]

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This is just 1 question, it's for Alpek. I just wanted to know if you are seeing a further decline or more stable feedstock prices going forward and particularly for the second half of this year?

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José Carlos Pons De La Garza, ALPEK, S.A.B. de C.V. - CFO [58]

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Thank you, Héctor for your questions. No, at this moment what we are seeing is paraxylene prices are being more or less steady at least for the month of June. We have stabilization of the key feedstock for our polyster business. And also for the other businesses that we're participating, there has been some changes in caprolactam, but it's as indicated minor parts of our business, so it is not a material effect within the business that we have today.

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Operator [59]

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There are no further questions at this time.

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Eduardo Alberto Escalante Castillo, Alfa, S. A. B. de C. V. - CFO [60]

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Thank you, everyone, for your interest in ALFA. And if you have additional questions, please feel free to reach out to us. We would be pleased to assist you. Thank you very much for joining us today.

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Operator [61]

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Thank you. This concludes today's conference call. All parties, may disconnect. Have a great day.