Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q1 2020 Earnings Call

0:00 Good morning, and welcome to ALPEC's second quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions given at that time. As a reminder, today's conference call is being recorded. Now, I would like to turn the conference over to Mr. Raul Millares, CFO of ALPEC. Mr. Millares, you may begin.

0:25 Thank you. Welcome to the first conference call of Alpec as a public company. For this conference, we will review our results for the second quarter of the year. Please notice that during the call, we will share forward-looking information based on variables and assumptions that are inherently uncertain. Therefore, actual results are likely to vary from those mentioned in this conference. Today, this first conference call of our company, Mr. Jose de Jesus Valdez, Pepe, our CEO, has joined us to comment on the results of the company. I will now turn the call over to Mr. Valdez. Pepe, please.

1:10 Thank you, Raul. Good morning. The very first thing I want to do today is to extend the warmest welcome to all of you to this, our first conference call ever. As you know, ALPEC became public just a couple, two and a half months ago. I thank all of the investors that participated in the IPO as well as all of those that have subsequently supported our shares with their investment. It's a clear manifestation of their confidence. We remain committed to executing our realistic but demanding business plan aimed at strengthening our competitiveness and achieving growth and superior returns we believe we can get in these new environments.

1:56 Let me start with the results for second quarter 12 by saying we have another strong quarter in line with our guidance. I will expand a little bit on what was behind our performance and then make a few comments on the conditions of our industry. Sales in the polyester segment continue to be strong. They were actually 7% ahead of the same quarter last year. Demand for our products allow us to keep our facilities busy. I think very important, the integration of the Pearl River PET plant is progressing very well, as well as the Columbia operation. In particular, in Columbia, we have been able to position our PET products as trade leaders in the market segments, which is, I believe, a big accomplishment.

2:49 The plant is working at full capacity, both PTA and PET in Columbia. And as we explained during the IPO roadshow, the polyester segment has shown a lot of resilience to slower economic growth and has been able to command stable margins in dollars per ton. The strong performance of this business segment is even more remarkable this quarter when we consider that in the same quarter last year, a force majeure of another PTA producer in the region pushed up sales and prices of our PET products. The total impact of that force majeure, we estimate to have been close to $20 million between second and third quarter of 2011.

3:40 So again, it was a very important, a very strong tailwind last year. And also we have to remember at the beginning of this year, There was an industry-wide adjustment in the PTA margin, in the PTA pricing mechanism, to support the competitiveness of our customers. So, again, in spite of those two differences, our results in this second quarter were very similar in the polyester, practically identical to last year. We were able to compensate for those factors with additional volume and with higher efficiencies in the operations. In the plastics and chemical segment, we have seen fits of prices following the downward trend of oil that have in turn triggered a decline in prices in the industry and, of course, the stocking activities of our customers.

4:36 I will elaborate on this later. However, let me say that in our key and most profitable products and markets within this segment, polypropylene, polystyrene, and chemical specialties, Demand has been growing and margins have been steady, or even growing a little bit. It is only in the case of Caprolactam where we have significant sales to China. And in our trading business, we do some trading with Monoethylene Glycol, where we have seen a reduction in volumes and in margins. important to point out, though, that in the case of the caprolactam business, fortunately, we continue to have very strong performance of the byproduct of the fertilizer that is the byproduct of the caprolactam.

5:31 And this has helped us offset, to a certain extent, the decline in the margins and volumes of the main product. Let me talk now a little bit about the, well, the industry in general. You are all aware about the world economy. It has been going through a very uncertain and volatile period for a number of reasons that you probably understand better than we do. However, the most important of those changes for us is the decline in oil prices that have occurred, particularly during the second quarter. And that's an important factor in our industry because normally it triggers a decline in the prices of products and feedstocks.

6:17 And in the case of ALPEC, this decline fortunately has not implied lower margins since, as we have explained to most of you, we have a cost-plus pricing mechanism that protects us from this declining in oil prices. And another important consideration is that De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord De Cv Ord Again, I have to say, as in previous periods of oil and feedstock volatility, we devote a lot of effort to manage our inventories and to quickly respond to these global market trends.

7:24 However, as strange as it might seem, for us, normally, when prices of crude oil or feedstock go down, puts pressure in our profitability because, as I mentioned, we have a cost-plus Cost plus contracts over prices change the physical prices immediately But sometimes we have to deal with the inventory so when prices are going down or where prices are just immediately But we have inventory at higher cost that we have to do You know that normally hits over profits and and and again when prices are going up the the the opposite happens you know that we normally have a You know a temporary benefit so again I have to say that during the second quarter, we have more or less managed very well this transition.

8:12 And particularly, I suppose, when you look at what is happening in the Asian market, this year the Asian petrochemical industry has seen difficult times. Again, as partly as a result of this crude oil prices coming down. There have been temporary shutdowns of polyester plants. And unfortunately for us, our activities are mostly focused in North America and we are more or less isolated from the situation in Asia, in most of our products. We have some exposure in our sales to Europe or South America, but for the most part, we are isolated from the trends in Asia. Our products have remained competitive in our marketplace.

8:58 Again, partly due to the PTA adjustment that we did at the beginning of the year, and again, Conditions in Europe and Asia have been more difficult. Our great exports, however, to North America has reduced the overall negative impact on us, and we remain confident in our businesses. We, on the other hand, are already seeing an important recovery of petrochemical feedstock in Asia, as I mentioned for the last two weeks, and we believe that hopefully for the remaining of the year, we're going to have a little bit more stable situation in terms of of prices and margins in Asia. Now, before opening this conference to the Q&A session, let me make also a couple of comments on the implementation of our business strategy that we explained to some detail with you during the IPO roadshow.

9:54 First, to tell you we're making progress on the first co-op implant in our PTA PET facility at Consoliacake. This investment, $130 million investment, should be ready by the end of next year, and it represents a very important step in making this site one of the most competitive in the world. And second, we have also authorized and started several de-bottlenecking projects, two at our Columbia PTA and PET plants, and another one over Pearl River PET plant. With a very marginal investment, these projects will be on stream in the following 12 months, and will increase capacity at such sites by approximately 10%. And of course, with the additional benefit of improving our cost position in all of these sites. And lastly, I believe some of you should be aware that our subsidiary, Petro Temex, has offered to repurchase its outstanding senior notes due 2014.

10:54 This decision goes in line with our goal of reducing our financing costs and extending the terms of our debt in as much as possible. We expect the transactions should be implemented in the next few weeks. And let me conclude my comments by reaffirming our belief on ALPEC's sound business strategy and healthy financial condition. We believe we are in a unique position to pursue our aggressive organic growth opportunities while at the same time We are capable of capturing other global opportunities that might present themselves. Thank you very much.

11:32 Okay, we are ready to begin our question and answer session. Operator, could you please instruct people on how to place their questions? At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Star one to ask a question. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Santiago Perez with Credit Suisse.

12:08 Hi, good morning, Raul and Pepe, and thanks for your time. We saw a hit on your NFC, which was affected by gas derivatives. Could you give us more color on your hedging strategy? And are these hedges fully used for production purposes? Thanks a lot.

12:25 Yes. Yes, Santiago. Let me explain to you. The main impact in the results is basically coming from our hedging, but not so much in natural gas. It really comes from our hedging activities in other commodities that we use for a polyester business. And since we use certain commodities as, for example, gasoline that has changed its prices in the last quarter from a very high level to a lower level, then we have to register in the financial side, this part of the changes. But actually, those are basically commercial-related, operation-related hedges. So it is really an accounting process in which we have to register the variation in the prices of gasoline.

13:15 Okay, perfect. So just to get this clear, it's fully used for operation, and it's a non-cash effect, right? It's a non-cash effect, effectively. Perfect. Thank you, Raúl. Your next question comes from the line of Nicola Lippmann with Morgan Stanley.

13:30 Hi, gentlemen, and thank you for the call. A couple of questions, if I may. First, you mentioned the bottlenecking and the co-chain in Veracruz. Can you give us a little bit more color on how you're doing any progress with regards to the PTA expansion in the U.S.? Also, if there's any news with regards to PEMEX, and some of the projects that you've been talking about there. And finally, how should we think about – so a little bit of Carla on deployment of cash sort of next six to 18 months. And then how should we think about the buying back of the debt at PetroTerm X? Is that a sign that maybe some of these expansions could take a little longer than you anticipated? So that's the first question.

14:18 The second question is a lot shorter. Can you give us some color on the inventory effect in terms of your EBDA for the quarter? You mentioned in the introduction that the mark-to-market, if you will, of lower-priced inventory had a bit of an effect. How big was that? Thanks. Okay, Nicolai, let me start with the strategic projects. We are making significant progress in both projects in defining the scope of the PTA-PET project in the US and also in the PEMEX projects we are concentrating our effort at this stage on the glycol project, which we believe is the most important for us.

15:04 So we're working very hard on those two projects. We're making significant progress. We believe that probably three months from now in the next conference call, we'll be able to be a little bit more specific on the timing and status of those two projects in particular. But those are progressing according to our expectations. In terms of the reason for, again, The payment of the existing bond. I think the main reason, as I mentioned, is to reduce our financial costs and extend our terms.

15:49 Obviously, what we're trying to do, I mean, is paying loans that are due anyway in the next couple of years. And we believe that with the new financial situation of the company, we should be able to raise debt at longer terms in very competitive or at very attractive rates. So we will be working or looking at raising debt for 10-year periods. And again, we believe with the rates today, we should be very, very attractive. And let me ask Raul to complement that.

16:30 Yeah, we will not stop our project process, our investment strategy with this payment. Actually, I think you should look at it the other way around. It will give us much more flexibility to go into other projects, in different projects, and then with the strong position that we have, we will be able to go into the financial markets and have access to additional credit if we need to go furthermore. So I think it goes directly in line with what we have been doing in the past. of be ready to capture any opportunities and continue our organic investment plan. In terms of the adjustment of EBITDA to adjust the inventory to mark-to-market values, well, what we were explaining before, and Pepe was explaining before, is that we try to manage very well our inventory, so the impact of those mark-to-market effects are relatively small.

17:28 Small, we think that for this quarter, basically the only business that might have some issue right now, well, maybe in total the whole business would have to have an adjustment in market to market of around $8 to $10 million. But if you consider the big drop in prices of feedstock, And so materials, I think it's a very small and minimal part of what you could have expected in a normal situation.

18:02 Thank you. Can you give a sense of the CapEx? I think you spent about $50 million year-to-date in CapEx. Just the full year, 2012, approximately, how big would that be?

18:15 Well, in terms of CAPEX, what we are already, as we mentioned, we are starting with these projects. They mentioned that the co-gen project and the bottlenecking projects. And I think we have half of what we have done is today in line of what we have done. We think that... Investment will accelerate in the second half of the year, basically because we are now fully engaged in the Cogen operation. So maybe the guidance that we gave in terms of investing this year will be around 100, between 100 and 120 million dollars. Of that, around half of it will be of, let's say, mandatory capex, and the other half of it will be going into these projects that we mentioned, the Cogen projects.

19:08 the bottleneckings in the polyester and PET plants. And some of that activities could also be related to the other projects that we were mentioning regarding the glycol projects and others. Thank you. Your next question comes from the line of Juan Carlos Mateos with HSBC.

19:36 Good morning, Pepe, Raul, Sabino. Thanks for the call, and congratulations on your first conference call as a publicly traded company. I have just two brief questions, and they're just a follow-up on something you had already mentioned, but one of them is more general and one more specific. The first one is on the destocking. Do you think that the customers are done with this destocking and taking advantage of possibly lower prices in petrochemicals? And have you seen evidence that they are placing new orders? Or do you think they're still on hold? Or what will be your expectation on this front? And the second one is on the plastic and chemical, I think the polyester, which is a bigger business. you touched about, you spoke about already in detail.

20:24 But what is your pricing outlook for the plastic and chemical business? It's 10% down year over year in this quarter. Do you think we should be seeing similar decreases in the following quarters or just perhaps leveling off going into the second half of 2012? OK, let me go with the stocking question. I think the stocking is mostly done by our customers. However, I have to warn you that the lowest price of feedstock and products is going to be in July. Actually, July prices, particularly in the polyester segment, the paraxylene prices reach a bottom in July. Just to give you a flavor for what we're talking about, the contract price in the U.S.

21:12 probably will be closing around 62, 63 cents per pound. And the existing price, I mean, the spot prices now are more like in the 70 cents per pound. So I think, again, we're going to hit the bottom of prices in July. We are expecting a significant increase for August. As a result of that, you know, our customers obviously are aware of this situation, and we're having a very strong volume month in July. So I believe that the answer to your question, I think most of this talking is done. And this is in the case of polyester. In the case of other plastics, let me talk about propylene as being the biggest one. And the same thing is happening.

22:03 In propylene, the prices of propylene polymer grade two months ago were 78 cents per pound and came down abruptly to 52 cents per pound. So in July was a rollover, 52, and we are expecting also a small increase going forward. So again, I think it's more or less the same situation. We believe most of the stocking has already been done, and we expect some increases actually in prices going forward.

22:43 be very useful and not from just knowing that we touched bottom in this month.

22:48 In July, in July, we're doing in July, we also seem to collect them business in Asia, bottoming down, I mean, we seems that prices are now come to a to, to the to lower level to around to around $2,300 per ton. Just keep in mind, you know, last year, Caprolactam prices was 3600. at a certain point in time. So prices have come down significantly. And again, the good news is that we've been able to maintain the results very steadily, even in spite of that significant price decrease.

23:30 Thank you. Thank you. Thank you. You touched on both items. And thank you for this very useful information about the bottoming in July. Thanks. Your next question comes from the line of Ivan Enriquez with HSBC.

23:47 Good morning, Pepe. Good morning, Raul. Congratulations on the results and thank you for the call. In addition to glycol, could you please give us any update on the paraxylene and propylene integration project with Pemex? And secondly, if I may, could you please comment on what is the weight of caprolactam cells to China within Alpek revenues or also within the plastics and chemical business, and what is the outlook for export of this product going forward? Thank you. Well, in terms of all the projects with PIMEX, as I said before, right now, as you can imagine, you know, transition in PIMEX is not easy. The change of administration is a difficult time to make a lot of progress.

24:35 So we are concentrating our efforts right now on the glycol project. we're focusing 100% on that. Because again, it's the project with the highest significance and importance for us. So we have not made as much progress, let's say on the propane dehydro and on the paraxylene project. So that's answer to your question. We are again, concentrated on the other projects, PTA, PET, new facilities in the US and the and the glycoproject. And so that will be the situation that we are doing right now.

25:20 In terms of the caprolactam activities, they represent about close to 20% of our revenues in the plastic segment, plastic and chemical segment, and about the same, a little bit more on terms of operating results, no? which is like 5% of the company, 5% of Alpec, somewhere between 5% and 10% of Alpec. And again, we believe that exports will continue. Exports will continue to China. The question is more the margins. Right now, on the Caprolactam, we see the price relatively firm. On the Caprolactam side, there is... a situation that is quite difficult to understand in relation to the feedstock prices.

26:10 Benzing prices have been very strong in the last three or four weeks overall, particularly in North America. So the question will be, in any case, more on the margins than on the volumes. But I think the volumes and exports are going to remain quite steady for the remaining of the year. We hope perhaps we're going to have a difficult July. difficult August, but we believe margins will start improving from September onwards.

26:42 Excellent. Thank you very much. Your next question comes from the line of Luis Vallerino with Citi. Hi.

26:53 Good morning, gentlemen. Thanks for the call. I was wondering if you can give us a little bit of color on the licensing schemes. How are they going? What is the expectation you have? And also, secondarily, if you can tell us as observers and participants in the global petrochemical industry, where do you think there is value right now in the industry and whether if you're looking at consolidation activity in the industry in general, especially with the latest news both from China and the current situation in Europe? Thanks. With respect to the licensing effort, we are making significant progress. We have, let's say, three projects very close to completion or almost in designing a contract stage.

27:42 In one particular case, one of those projects is signed already with a Chinese company. The Chinese company is waiting for the government approval permit to go ahead with the plan. As you know, there's going to be a change in China. I understand September, October this year, there's a change in the administration, and every administration comes ahead with a new five-year business plan. So we are waiting for the new administration to authorize or to approve this permit. So one project is already done, and there are two other projects that we believe are closed, and like three or four additional projects in the Middle East, in Eastern Europe, that we are looking at in a less advanced stage of development, but with good, let's say, with good possibilities.

28:40 In particular, our technology seems to be very suitable for Middle East because our technology has the advantage of consuming much less water than the alternative technologies, and that is very important in the Middle East.

29:00 Great, thanks. And what about your view on the global petrochemical industry and where you can find value and will more solutions should be connected? You mean future growth, M&A or in general?

29:14 Exactly. Well, M&A, as you know, those projects are very difficult to talk about ahead of time. We are looking at possibilities let's say in several countries, but right now all of them are in a very early stage.

29:39 Great. Fair enough. Thanks so much. Your next question comes from the line of Rafael Escobar with Vector.

29:50 Good morning, gentlemen. Thank you for the call and the opportunity. I have two questions. Would you also tend to tell us which companies you mentioned in your previous major programs that you took benefits at the second quarter of the last year? And the second is, what happens if you split the production of the new wheat and acquisitions in the performance of Altec? I mean, with and without the new plants acquired. Thank you. Okay, well, with respect to your first question, the company that had a force majeure last year was BP, which is the largest producer of PTA in the US.

30:35 Okay. And at the time, you also have to remember at the time also, possibilities to import PTA from other parts of the world is very, very limited. There was a scarcity of product all over the world. So that had a lot of impact or a significant benefit on our sales last year.

30:57 In relation to the second question, at this point in time, I think it's very difficult now to take out what we acquired and put it and make some kind of a calculation of what would be if we didn't have acquired them because the integration has been now totally full there and it's It's very difficult to now simulate or try to estimate what would have happened if we didn't acquire it. So it's very difficult, but certainly we had a very, very important strategy in integration, and I think the results have been above of what we expected. Yeah, I think it's difficult to give you a specific number, as Raúl says, Rafael, but I think we are certainly getting a return of perhaps four times the VDA.

31:45 I mean, four times the investment we pay, we're getting VDA, which is equivalent to like four times, which is certainly better than what we were expecting originally. More synergy, higher volumes, lower cost, a lot of reasons for that. And again, you have to remember that right after we started, The first acquisition, there was this force majeure, which was very... I mean, we were very lucky with that as well, you know.

32:12 Okay. Okay, I see. Okay, thank you. Your next question comes from the line of Eric Dominguez with GBM.

32:24 Hello, good morning, Raul and Pepe. We were just asking a brief question about the congeneration project in Veracruz. When are we going to start looking at some cost reductions? I know the project is supposed to start in 2014, but when are we going to start to see some reduction in costs? As a result of this project, Eric? Is that your question?

32:50 Exactly. In 2014? Yes, but is it going to be immediate after the project is completed? Yeah, it should be immediate. Yes.

33:01 Okay, okay. We should be immediate. Yeah, yeah. We should be seeing important cost reductions immediately.

33:08 Okay, okay. Thanks. That's my only question. Thanks. Your next question comes from the line of Herminio Padruno with GBM.

33:20 Hi. Good morning, Raul and Pepe. Just a follow-on with the cogeneration plants in Tosoleaque. How much of your energy needs are you planning to fulfill with the completion of the first plant? And by how much do you expect to reduce your energy costs? Well, actually, we are going to have excess energy after. I mean, in terms of steam, we're going to obviously fulfill 100% of our needs in that particular location in the Cozolecaque facility in terms of steam. In terms of electricity, we're going to have excess electricity. and we are going to sell that electricity to different customers here in Mexico. So the question about the cost reduction is difficult.

34:08 I'd rather tell you that we expect to receive or we expect an EVDA somewhere between $50 million and $60 million as a result of that project.

34:20 Okay, perfect. And if I may ask another question, it's regarding the Integrex licenses, how much do you earn by selling them, and are you planning to sell some this year? As I mentioned, we have three licenses, three opportunities that are very close. And, well, I don't know, at this time we can share with you the, let's say, the royalties that we're going to be charging, but they are significant.

34:53 Are they all like a one-time income or are you expecting to be receiving earnings throughout the year? No, these are going to be lump sum type of royalties. It's a one-time income, yes.

35:05 Okay, perfect. Just to clarify, this lump sum is paid throughout the time of the construction of the plan. So you receive a certain amount at the beginning, then you receive another amount later on, and then you receive the final payment once the plan is in operation.

35:22 Okay, perfect. Thank you very much for answering my questions. And your next question is a follow-up question from Luis Vallerino with Citi.

35:34 Thanks again. Yeah, I mean, it's not really a follow-up. It's actually a question. I mean, I was just wondering if, you know, with the current view that you have on petrochemical prices, on the feedstock prices for the rest of the year, and assuming that we are, I mean, that the trough of this recent weaknesses happen in July what would you expect for the whole of 2012 to be your cost structure both on the PT on the polyester business and on the plastic and chemical business in terms of how much of the cost would be PTA how much would it be propylene etc labor depreciation etc well with raw materials are by far 80% to 85% of our cost.

36:25 The next cost in importance will be energy, which this year is probably 4%, 3%, 4%, 5%. And then the rest is other costs, fixed costs, and other catalysts and other materials. But by far, in terms of cost, the raw materials are the key factor for cost. Now, what's going to happen with those raw material prices? Again, the way we see it now is that for the remainder of the year, they're going to be relatively strong, that we believe we've touched bottom. But this is very difficult because this is also related to crude oil prices. And as you know, crude oil prices are very much related to the macroeconomic situation in general. Again, you have issues in Europe, significant issues in Europe or even in China.

37:14 And then this whole... You know, the whole scenario might change. But our current view is that crude oil prices are going to remain pretty much where they are now. And from that perspective, again, it's like we said, we don't expect another significant reduction of prices for the rest of the year. If anything, a small increase or some reasonable increases, which normally, as I explained to you before, help our results. So for us, For us, the biggest challenge normally is when prices of raw materials come down abruptly. Some of you might remember, I mean, when you look at our EVDA in the last years, you might remember the way EVDA in 2008. We have a significant reduction in EVDA due to these inventory adjustments or valuation, you know, the inventory loss.

38:09 But again, we believe we've seen the bottom, at least for this year. And based on that, we are relatively optimistic of prices of our products and feedstocks in the next months.

38:25 Got it. Thanks. I guess on a question that should have been phrased differently, I mean, with this behavior both in crude oil prices and in derivatives, There was no real significant change in your cost structure from that 85%, which is the usual level for raw materials. It's not like the equation was changed because of this, at least temporarily. Yeah. Well, obviously, if crude oil price goes down and fiscal prices come down, this 85% comes down a little bit. But it's still by far the major component of cost. Got it.

39:02 Thanks so much, Edwin. Thank you.

39:08 Okay, I think with this, we now conclude our conference call today. However, we remain available for anything. You should have any additional comment, any additional question or comments that you might have. Thank you very much to everybody for being here this morning with us. This concludes today's conference call. Thank you for your participation. You may now disconnect.