Sigma Foods, S.A.B. de C.V. (SIGMAFA) Earnings Call Transcript

Good morning, and welcome to the Sigma Foods Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. The replay will be available on Sigma Foods Investor Relations website later today. I will now turn the call over to Hernan Lozano, Sigma Foods IRO.

Thank you, operator, and good morning to everyone joining us today. Further details regarding our third quarter results can be found in the press release and earnings presentation that were distributed yesterday. Both documents are available in the Investor Relations section of our website. Before we begin, please note that today's discussion will include forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially. Sigma Foods undertakes no obligation to update these statements. It is my pleasure to participate in today's call together with Rodrigo Martinez, CEO; and Roberto Olivares, CFO. Today's agenda is straightforward. Rodrigo will start with a strategic overview of the quarter. Roberto will follow with a financial review, and we will conclude with Q&A. With that, I'll turn the call over to Rodrigo.

Thank you, Hernan, and good morning, everyone. The strong momentum from earlier in the year continued throughout the third quarter. We're pleased to report that Sigma Foods delivered record quarterly and year-to-date volume, revenues and comparable EBITDA. In addition, we revised up our full year comparable EBITDA guidance to approximately $1.14 billion, supported by a positive outlook for the remainder of the year. These results reflect consistent execution across our operations and the strength of our business model. A favorable balance of external factors also contributed to the good results during the quarter. Specifically, Sigma benefited from a positive foreign exchange rate effects and lower raw material costs versus 2025. Mexico delivered its strongest quarter ever. This is the region where we operate at a larger scale and with the highest level of diversification, highlighting the strength of our consumer-centric business model we're building across our current geographies. Europe achieved its highest third quarter comparable EBITDA since 2020, sustaining a remarkable multiyear turnaround. Solid performance in the Iberian Peninsula and positive results in the Fresh Meats business have been key drivers of our double-digit EBITDA growth year-to-date. We're pleased to be capturing temporary commodity-driven benefits in Fresh Meats, while the regulatory process for the sale of our majority stake in the business is completed. In the United States, we delivered higher EBITDA year-over-year, driven mainly by operational efficiencies and the successful integration of Roger Wood Foods. Our U.S. team increased EBITDA per ton, offsetting the effects of lower volume in a soft consumer environment. Turning to capital allocation. We continue to prioritize investments that support our long-term growth prospects. Through September, CapEx totaled $295 million with approximately 70% directed to strategic projects. Our three largest being the comprehensive capacity recovery in Spain, a global digital transformation initiative and a set of high-return opportunities in Mexico to further grow cooked meats and dairy. Returning value to shareholders is also a core part of our balanced approach to capital allocation. Shortly after our quarter end, we paid the second installment of our annual cash dividend, approximately $75 million. Together with the first payment in April, cash dividends for 2026 totaled approximately $150 million, up 26% versus 2025. To sum up, 2026 is on track to be a record year for Sigma Foods as we consistently deliver on our financial commitments, invest in our future growth and return value to shareholders, all from a position of financial strength. I will now turn the call over to Roberto for a more detailed discussion of our third quarter financial results.

Thank you, Rodrigo, and good morning, everyone. Total revenues of $2.5 billion increased 3% versus 3Q '25 and accumulated $7.3 billion were 7% higher than the first nine months of the year. This good performance included a 2% quarterly volume growth and a 2% higher average prices, reflecting a favorable foreign exchange conversion effect. Third quarter EBITDA and comparable EBITDA were up by 23% and 20%, respectively, supported by year-over-year growth across all regions. Let me walk you through key results by region. Mexico posted higher third quarter volume, revenues and EBITDA, both in local currency and in U.S. dollars. Volume growth accelerated to 3% as average prices in Mexican pesos decreased 1% year-over-year. By channel, both retail and foodservice volume increased during the third quarter. Similar to the first half of the year, dairy remained the largest contributor to volume growth in Mexico, primarily driven by value-added yogurt. In addition, lower raw material costs provided packaged meats greater flexibility to improve volume trends. In Europe, third quarter volume increased 5% year-over-year, while EBITDA grew 48% in U.S. dollars and 50% in euros. This performance reflects the operational recovery in the Iberian Peninsula and a positive contribution from the Fresh Meats business. Both EBITDA margin and EBITDA per ton have improved consistently since 2022, and we anticipate this progress should expand further in 2027. In the United States, operating efficiency has taken center stage during the current soft part of the consumer cycle. Third quarter volume decreased 4%, yet EBITDA increased 2% year-over-year, including the contribution from Roger Wood Foods. On an organic basis, EBITDA was flat, supported by productivity initiatives. EBITDA per ton increased 6% in the quarter. And by protecting unit profitability, we are preserving a solid base for EBITDA to accelerate when volume recovers. LATAM achieved record third quarter volume, driven by strong demand in Peru and Ecuador, with revenues up 3% year-on-year in local currencies. Quarterly EBITDA increased 3% in U.S. dollars and declined 3% in local currencies, reflecting lower contributions from the Dominican Republic and Costa Rica. On an accumulated basis, EBITDA grew 8% year-over-year in local currencies, supported by improved price cost alignment and operational efficiencies. Moving on to selected items below the EBITDA line. Our financial cost net was $90 million during the third quarter compared to $55 million in the same period last year. The increase was primarily driven by foreign exchange fluctuations, which resulted in a $19 million loss this quarter versus a $13 million gain a year ago. Underlying financial expenses increased only 3% year-over-year. A similar effect is observed in accumulated financial cost net, which is 90% higher year-over-year, mainly driven by lower exchange rate gains. Consolidated net income was $249 million during the nine months ended in September. This is 12% lower versus a high comparable base in the same period of 2025, which benefited from $104 million in extraordinary gains at the EBITDA level. We closed the third quarter with a solid financial position. Net debt totaled approximately $2.7 billion, down $174 million sequentially, reflecting a strong EBITDA generation, a recovery in net working capital and the benefit of noncash foreign exchange conversion effect on our peso-denominated debt. This brought our net debt-to-EBITDA ratio to 2.4x, back below our 2.5x long-term target. Before we open the call for questions, a brief comment on initial thoughts regarding 2027. We are pleased to be closing 2026 with an upward EBITDA guidance revision, and we're beginning to identify factors that could change 2027. From a macro standpoint, we anticipate a weaker Mexican peso than the year-to-date average exchange rate of 17.4%. In the Americas, current raw material trends point to a supportive environment, particularly in the first half of the year, which is expected to benefit from a high comparable base. In the U.S., focus will remain on the variables we can control, working on new initiatives to support volume recovery while building on the efficiency gains we have achieved to protect profitability. In Europe, we look forward to the start-up of our new facility in Valencia, restoring a key component of our manufacturing footprint. 2027 should be also be the region's first year of operations with a sharper focus on branded products following the sale of a majority stake in our Fresh Meats business. We plan to share our full year 2027 guidance in February together with our fourth quarter results. As in previous years, revenues and EBITDA will be presented on both an FX Neutral and an FX Specific basis. We will continue to monitor external factors as we prepare our outlook. We are now ready to take your questions. Please, Hernan.

Thank you, Roberto. We will now open the line for questions. Operator, please.

[Operator Instructions] Our first question comes from Henrique Moraes of Morgan Stanley.

I have just a follow-up on the previous slide that you shared about the 2027 outlook, pretty helpful information already. But if you could just dive a bit deeper on your comment on the raw material side. So for instance, if you could comment if you are already building inventories or hedges positions that make you more comfortable with the first half or even the second half of next year? And how you are seeing also oil-related costs such as logistics and packaging and other items as well. And also on the Mexican peso, if you are already hedging some positions or if you did hedge some positions a while ago as well. So just more granularity and color on what you expect in terms of costs into next year would be very helpful.

Thank you, Henrique. This is Roberto. Sure. So let me walk through some of the key assumptions. So regarding raw material, as you remember, prices of most of the Americas raw material, turkey, but mainly boneless pork started to decrease through this year. So we have, particularly for the first half of next year, we will have a high comparison base in regard to turkey. So we do expect that to help a little bit with the comparison. As of right now, we continue to see, particularly in the Americas, a positive raw material environment for next year. There's no signals that could lead us to think otherwise. And again, particularly in the first half of the year is where we're looking for a better comparable base. In regards to inventory, so we usually do some inventory for some key raw materials. As the prices have gone down, those strategic inventories have gone down as well, we are taking advantage of these low prices. If we see the potential of these prices to go up, we will start to do some more strategic inventory in order to hedge ourselves for high raw material prices. Regarding oil and oil prices and the implication that has on both raw material, as you mentioned, packaging and freight, we do expect that the volatility on gas prices and oil prices continues to impact through the fourth quarter and maybe in the first half of 2027. We're still reviewing the impacts of that effect on our EBITDA guidance. As we mentioned, we're going to launch or release our official 2027 guidance in February of next year. Regarding Mexican peso hedges, we do hedge for the raw materials that we buy in U.S. dollars for the Mexican operation. We have a rolling forward program that hedges for three months in advance. And this is something that we have all year. And that is kind of the time that it takes us in the Mexican operation to be able to reflect prices in cases necessary for depreciation of the Mexican peso. We continue to have that program in place as the Mexican peso fluctuates and has fluctuated recently.

Our next question comes from Ryan Levitt of Barclays.

My quick follow-up is a little bit about raw material costs. So with the favorable environment this quarter and it appears to be next quarter and into early '27, how are you thinking about reinvesting those cost benefits into price and volume versus retaining them in margins, especially as you think about volume initiatives in the Americas for early next year?

Thank you, Ryan. This is Roberto. So yes, we have seen a good raw material environment. And as you see prices both in Mexico and the U.S. have remained either flat or decreased a little bit, particularly in Mexico, in the case of processed meats, where we have seen most of the cost fluctuating downwards is that we're seeing a little bit more impacting volume and more flexibility to impact volume. We're focusing right now on increased volume in packaged meats in Mexico. In the case of U.S., on one side, we had lower raw material costs. But on the other side, we have had particularly this last quarter, more logistics and freight costs given what is happening to the gas prices in the U.S. And thus, the lower raw material prices has helped us to mitigate some of that impact and not being necessarily putting a lot of effort into increase prices in the U.S. in order to incentivize more volume there. So this is a good balance between protecting margins and protecting the long term, we won both of the times. And as the raw material prices continues to remain in this level, we will have more flexibility to improve volume trends.

And Ryan, this is Rodrigo, just to complement, a good way of thinking about it in general is we do want to have long-term growth or medium-term growth. And at the same time, we do see EBITDA per ton. So a good way of thinking about it is perhaps maintaining EBITDA per ton, especially when prices of raw materials go up or down and balance that with some growth in the short and medium and long term.

Our next question comes from Felipe Ucros of Scotiabank.

A couple of questions on my side. The first one relates to peak gross margins. The quarter saw the highest gross margins we've seen in 1.5 decades at Sigma as far as I can tell from my model. However, the price in your raw materials was still falling throughout the quarter. And I'm guessing that, that still needs to make its way through inventories, right? So am I thinking correctly that even though gross margins are kind of a peak in a long time, it may continue to climb into next quarter? And then the second question is about the EU. It's a bit hard to look at the underlying business with the M&A noise and the replacement production that you have. So you can't really look through the underlying performance. Wondering if you can talk a little bit about whether you've been able to maintain packaged meat prices in the EU or maybe how that's tracking versus the downward trend that you're seeing in the commodities. That would be great.

So Felipe, let me start with the first part, and I'll let Roberto answer the second one. Again, I think when you think about the raw materials and gross margins, I think it's important to think about it in per ton and at the same time, our volume growth. It could be the case in the past that we have big increase of prices or costs in some of our raw materials, and we did increase prices to maintain EBITDA per ton. And sometimes that can get to a consumer not to grow in volume. So what we try to do is have that balance of being able to have a consumer that can buy more for products and at the same time, have a healthy gross margin or EBITDA per ton. So the way I would think about it is if we see raw materials going one way or another one, that will leave us some space to either if the price of raw materials go up, perhaps we can increase prices some to maintain EBITDA per ton. If the prices of raw materials go down, then we can play with that and some volume growth. So I think it's more about the balance of those two.

And in regards to your second question about Europe, Felipe, Sure. Yes. So in Europe, in general, if you see revenues, revenues in euros were 5% below, but that has a lot to do with price. So price is around 9% below. Volume is 5% above last year. And the second price has to do with the mix effect of both higher Fresh Meat sales because of we're improving in general volume there, but also given that this is more a commodity market, raw material prices has gone down and so prices of our sales has also gone down and prices of our sales have also gone down. So if you see that is the effect on revenues. If you see profitability of that sales, EBITDA has increased a lot during this quarter versus last year. So 50% in euros, and that has to do with the more sales that we're doing both in Packaged Meats and Fresh Meats are giving more EBITDA per ton. You see EBITDA per ton in Europe has increased significantly versus last year. And you start to see the turnaround to continue in Europe this quarter, we are more similar in terms of EBITDA margin than before the Russia-Ukraine war, and we expect that trend to continue in 2027.

And Felipe, just to go a little further, I think the Fresh Meats business in Europe goes even more to the site that I was mentioning on your first question. We do see changes in the cost of raw materials. And for that fresh part, we're more immediate of changing prices. But at the end, that allows us to maintain EBITDA per ton, and that brings some of good growth. So like Roberto said, we do see a decrease in prices in Fresh Meats. We do see an increase in volume in Fresh Meats, and we do see the combination of those two being a very positive EBITDA on that business.

Our next question comes from Rodolfo Ramos of Bradesco.

Quite encouraging to see record volumes in Mexico in what has been a challenging consumer environment. So I just wanted to see if you can tell us a bit about the performance you've seen on the volume side. Is it coming from better execution, market share gains? Or is it more of a channel expansion within the specific categories that you're in? Not sure if the World Cup had also some impact in July.

Thank you for your question. This is Roberto. Yes. So in Mexico, we're seeing better volume this quarter in both the retail and foodservice business. Retail is increasing around 3% and foodservice around 5% volume versus last year. Similar dynamics than that has happened through this year, where we see dairy growing higher than packaged meats, although this quarter, we start to see some different trends in packaged meat, again, due to the flexibility that raw material and prices has had effect on volume. Yogurt remains to be the largest contributor to Mexico's volume growth, particularly Value Added Yogurt, the Greek yogurts that we have had growth. In general, we are getting into, I mean, protecting our categories is, I will say we're trending a little bit better than the category, and that has a lot to do with execution and innovation. We have been able to understand the needs of our consumer and be able to serve them as best as possible. And that's mainly the big reason.