Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q1 2023 Earnings Call

0:01 Good morning and welcome to Alpex first quarter 2023 earnings webcast. We very much appreciate everyone's participation. I am Antón Fernández, Alpex IRO, and today I have the pleasure of being joined by our CEO Jorge Young and our CFO José Carlos Pons. This presentation is divided into two parts. First, Jorge and Jose Carlos will comment on Alpex's first quarter performance, footprint optimization, corporate governance, and revised CapEx. Afterwards, we'll move on to Q&A. Please note that the information discussed today may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to certain risks and uncertainties.

0:50 Actual results may differ materially, and the company cautions the market not to rely unduly on these forward-looking statements. ALPEC undertakes no obligation to publicly update or revise any forward-looking statements, whether it is as a result of new information, future events, or otherwise. I'd like to remind everyone that today's webcast is being recorded and will be available on our website at alpec.com. I will now turn the call over to Jorge.

1:23 Thank you, Anton. Good morning, everyone, and thank you for joining us. I would like to report that despite the challenging market environment during the first quarter, Alpek delivered a comparable EBITDA of $207 million that was in line with the outlook we envisioned. We also made progress in improving for asset footprint. through the rationalization of one of our polyester assets, strengthening our business accordingly, which we will review in further detail later in the call. Let's start by reviewing the main topics we will cover today. First, I will introduce some of the key highlights for the quarter and Jose Carlos will cover Alpex financial performance in greater detail a bit later in this presentation.

2:19 Second, we will provide more insight into the asset footprint improvement I just mentioned. Third, we will cover ALPEX recent additions to our board of directors. And finally, we will provide more comments on our revised CAPEX guidance for 2023. The first quarter results were characterized by lower demand, mainly in the polyester segment. Although we did experience some signs of recovery as the quarter progressed, the main reasons were still elevated inventories in the value chain. We maintained reduced exports, particularly in polyester due to higher regional prices of key fish stock paraxylene.

3:09 Macroeconomic environment pressures such as high inflation rates that impacted consumption. Continuous seasonality for PET and relatively weak demand in some industries such as construction affecting EPS business. On polyester, Asian integrated PET reference margins were 2% higher versus the previous quarter, averaging $343 per ton. and with a spread between Chinese and Asian reference margins also increasing to $120 per ton. Meanwhile, polypropylene reference margins declined to an average of 17 cents per pound, 26% lower quarter on quarter, which is in line with Alpec's expectation.

4:05 The sequential decrease was mainly due to the rising polypropylene supply in the Americas as new capacity has come on stream. EPS reference margins have continued to gradually return to historical levels, averaging 49 cents per pound, a 23% reduction quarter over quarter. Reference ocean freight costs have continued to normalize to historical levels, resulting in a reduction in import parity pricing, which is relevant to our businesses, in particular for polyester and EPS. At this point, Jose Carlos will take over and delve more into the financial results.

4:55 Thank you, Jorge, and thank you all for being here with us today. I would like to share with you some of Alpec's main highlights during the first quarter. To begin, overall volume was 1.16 million tons, a reduction of 6% quarter over quarter, primarily as a result of high pet inventory levels in the market, seasonality, and lower exports in the polyester segment. Compatible EBITDA reached $207 million in line with Alpec's expectations for the quarter. However, representing a reduction of 23% quarter over quarter, mainly due to lower demand, the decrease in reference margins in the plastic and chemical segment, and continued normalization of reference ocean freight costs.

5:42 In the first quarter, Alpec paid a dividend of $159 million, reaching an implicit dividend yield of 5.4% for the year. Total volume was 1.16 million tons for the period, a reduction of 6% quarter on quarter. In the polyester segment, volume was 939,000 tons, 7% lower quarter on quarter. The segment experienced a softness in demand due to high pet inventory levels in the market, particularly at the beginning of the year. During the first quarter, we also experienced reduced exports, driven primarily from the increased cost of paraxylene, Due to prices connection between North America and Asia.

6:27 In plastics and chemicals, volume was 222,000 tons, 2% higher quarter on quarter and above expectations. Despite the mine softness in some industries and additional polypropylene supply in the Americas. Moving on to raw material price dynamics, the industry experienced a gradual decline in brand crude oil prices to an average of $81 per barrel, 8% lower than in the previous quarter. Accordingly, US reference paraxylene prices decreased by 3%. In the plastic and chemical segment, average reference propylene prices increased to 50 cents per pound, a 56% increase when compared to the previous quarter, primarily due to shortages in PGP supply.

7:15 Switching over to EBITDA breakdown for the quarter, overall comparable EBITDA for the quarter was $207 million, 23% lower than in the previous quarter. This was mainly due to lower demand, a decrease in plastic and chemical segment reference margins, and continued normalization of reference ocean freight costs. It is important to note that these figures were within our quarterly expectations. Reported EBITDA was $187 million. 1% higher quarter-on-quarter, and this result was primarily incorporates the Cooper River site at one-time shutdown costs. If we take a closer view at results by segment, polyester comparable levidad was $133 million, 12% lower quarter-on-quarter. As commented before, this result reflects an increasing nation integrated polyester reference margins, Softer pet demand due to higher than expected inventory levels and paraxylene prices connection between North America and Asia that continue affecting the import parity pricing and exports.

8:22 In plastic and chemicals, comparable levity resulted in $77 million, a 36% decrease quarter on quarter. This was mainly due to an increase in supply of polypropylene affecting reference margins and gradual return to historical levels of EPS reference margins due to lower demand within certain industries such as construction. With regards to free cash flow generation, networking capital investment increased by $66 million, primarily due to rising raw material prices in the plastic and chemical sectors. CAPEX totaled $52 million and was mainly allocated for the Corpus Christi Polymers project and to a lesser degree towards the scheduling maintenance.

9:09 ALPEX distributed a total dividend of $185 million during the first quarter. Of this amount, $159 million was paid to shareholders as approved by the Annual General Shareholder Meeting and the remaining amount to minority shareholders. Free cash flow for the quarter was minus $29 million. Finally, regarding the company's financial position during the first quarter, Alpex net debt increased to $2.1 billion. Last 12 months, reported EBITDA was $1.2 billion, therefore resulting in a leverage ratio of 1.8 times net debt to EBITDA. Thank you, everyone. I will now turn the call back to Jorge.

9:54 Thank you, Jose Carlos. In line with AlPEC's footprint optimization efforts, AlPEC announced that it would indefinitely shut down the PET resin operations at the Cooper River site near Charleston, South Carolina. The site was developed in the early 70s and had an installed capacity of 170,000 tons of PET resin. The corresponding PET resin production was transferred to other AlPEC sites enabling cost reductions of approximately $20 million at an annualized rate. This initiative is aligned with AlPEC's effort to continuously enhance our cost competitiveness.

10:43 Effects associated with the shutdown during first quarter 2023 include $14 million in non-recurring reported EBITDA costs, which will be compensated during the year from the cost optimization. Additionally, there is an effect of $47 million in asset impairment, which represented approximately 2% of Alpek's total fixed assets. At Alpek's annual general shareholders meeting, we accomplished the election of three new members to the board of directors. These are Jose de Jesus Valdez, or former CEO, and two independent board members, Monserrat Ramiro Jimenez and Alejandro Mariano Werner.

11:38 As a result, ALPEC's board of directors is now comprised of nine independent board members. We're excited to welcome the new members of the board, and I'm confident that their addition will support ALPEC's long-term growth strategy and ESG goals. To conclude, ALPEC originally provided a 2023 CAPEX guidance figure based on the long-term growth strategy to strengthen core business and provide strategic and focused growth. We have decided to revise the CAPEX guidance to $335 million from the previous amount of $445 million. as we're taking more time to further optimize the investment estimates and prepare the projects for final investment decision.

12:28 Thank you for your attention. I will now turn the call back to Anton to open the webcast for Q&A.

12:36 Thanks, Jorge. At this time, we'll now take your questions. To ask your question live, we ask that you raise your hand virtually. We will call on participants in the order that Hanser raised. Alternatively, you may also type your questions through the Q&A function. We will attempt to cover as many questions as time allows. Our first question comes from Tasso Vasconcelos from UBS. Hi, Tasso. Please proceed with your question.

13:09 Hi, Anton. Hi, Jorge. Hi, Jose Carlos. Thanks for taking my questions. I have two questions here, more focused on the CAPEX, the new guidance you gave. First, I think it would be great to hear more details on the breakdown for this CAPEX from this $335 million for the year. What is the maintenance CAPEX? What is CPP? What is strategic investments, cost optimization, growth, if there is any, and so on. So a breakdown on the CAPEX. And second, we've seen the reduction on this CAPEX guidance, right, for the year, but you maintain the volumes, expectation, revenues, EBITDA, and so on. So it would be great to hear from you exactly where this CAPEX would be invested.

13:58 And since it did not impact this year's expectations, what could be the impact on next year's performance? Those are my two questions. Thank you.

14:10 Yes, Taso, thanks for the question. I think on the CAPEX guidance, basically it's one of our projects that has the intent to reduce our variable costs that we're going to take more time to further optimize investment and make it more attractive. As far as the remaining guidance of 335, the main component is our investment in Corpus Christi polymer that continues There are other projects for improvements across the plants, but the second largest category would be our maintenance CAPEX. So those are the Corpus Christi or maintenance CAPEX and other miscellaneous projects across our system.

15:00 And the project we're taking more time to study and And more than anything, border-optimized investment has no implications on 2023 volumes or cost. That's more a longer-term project scope. I hope that answers the questions, Tasson.

15:35 Sorry guys, I wasn't with you. Yeah, that answers. Thank you.

15:38 You're welcome. Thank you, Tasso. Our next question comes from Leonardo Marcondes from Bank of America. Hi, Leonardo, please proceed with your question.

15:50 Hi, guys. Can you hear me well?

15:53 Perfectly well.

15:54 Thank you. Okay, so thank you. Thank you for picking my questions. I have two from my side. My first question is regarding the shutdown of the Cooper River site. I would like to know if you guys could share what should be the level of integrated margins for you guys to decide to reopen the site. And my second question is regarding the spreads. When we look to the PP margins, This is the petrochemical which has been facing the most challenging scenario, right? So I would like to know when do you guys expect a rebound in PPP margins to healthier levels and what should be the drivers for this eventual PPP margins?

16:47 Thank you.

16:52 On the Cooper River question, I think it's very unlikely that we will go back to and reconsider the asset to run again. As I told you, as we mentioned earlier, this is an asset that had the highest cost structure. And it was also in our long-term plans to eventually replace this asset with more competitive capacity. We have now more competitive capacity in the system with the recent addition of the Oman facilities and we have Corpus Christi or share of Corpus Christi underway.

17:40 And the relative size of the Cooper Riverside would not really materially impact the the the total margin of the company uh in case we were going to restart it and and but i hope that answers the first question on this press of uh in particular polypropylene i think when you look into you know consultant forecasts generally speaking It is believed that the current level seems to be the bottom or very, very close to the bottom. I think we're pleased to report that in spite of that situation or performance in plastics and chemicals or relative performance in plastics and chemicals, in particular in polypropylene is very strong compared to Pierce.

18:36 And I think the, you know, there is now more capacity and I think that capacity is going to, you know, over the next few years, next couple of years is going to be absorbed with the, in the market as the market, you know, um, uh, grows a little bit and that capacity is absorbed and, and, um, but that's, that's the, that's our view on, on, on the polypropylene spread. So bottoming out, Your annual recovery over time because it was a relatively large amount of capacity that came on stream. But again, our asset and our business is very well positioned to weather these next few years.

19:25 That's perfect. Thank you.

19:30 Thank you, Leonardo. Our next questions come from Nikolai Liebman from Morgan Stanley. Hi Nik, please proceed with your question.

19:38 Thank you very much for taking my questions and thanks for the call. My first question pertains to the debate between volumes and margins. So volumes, as far as I can see, which is really weak. We look at Nielsen, what category in North America or US looks to be almost low double digit. Crown was up. Can you talk a little bit about that dilemma? To what degree are you hogging margin contracts and letting go of a lot of volumes? What are really the dynamics that are in play here? And then the second question is pertaining to RPED. How is the recycled product performing in this volume downturn, both in terms of... The ability to defend the margin and also the stickiness of these contracts. To what degree are you finding a higher customer loyalty in the RPAT project? And then finally, you had comments in the prior quarter pertaining to The Russian sourced PX that of course would be lower priced and how that was creating a degree of disruption in some of your markets. How is that playing out?

20:52 Where do we stand now? Thank you very much.

20:56 Nikolai, thanks for the questions. You know, the first questions on the volume and the last question about the Russian situation and the paraxiling are somewhat or to a large extent related. I think in the volume question, there is a component that we have reduced for participation in some regional markets, especially export markets from our facilities, not necessarily the markets where our facilities are located, but export markets. And that is because, as we mentioned the last time, we continue to experience higher relative prices of paraxylene in our region.

21:51 On one hand, those are driven by higher alternative values for the feedstocks that are needed to make paraxylene. That situation is not totally new because it happens from time to time. And normally we have the ability to import paraxylene and to manage when that situation happens. The issue that we continue to face is over the last six to 12 months, especially since the war between Russia and Ukraine began, the cost of transportation for liquid petrochemicals which is very different industry than the transportation of dry goods in containers uh transportation of liquids has increased in cost and because there is a you know very high demand for vessels to move liquids So that is causing the import prices of paraxiling to be also more expensive than normal. I think we think that situation is going to be here perhaps a couple or a few more quarters.

23:10 We don't think it's a structural long-term issue, but that is one of the reasons why we have withdrawn from some markets. And yes, in domestic markets, to a much lesser extent, there are situations where we choose to protect margin versus volume. But the bulk of our volume adjustment is on reduced exports and highly, highly correlated to the more expensive paraxiling. That again, we have tools to deal with it. But our key tool, which is to import, right now we are also facing higher transportation costs in liquids mainly due to the Ukraine-Russia war and all the effects that created on the rebalancing of the world of moving liquid fuels and especially liquid fuels that drag liquid petrochemicals.

24:13 On ARPED, the question on ARPED continues to be an essential component of our offering for the customers. We deliver ARPED content to our customers in various forms. We can make pellets that are 100% made of recycled polyester, or we can introduce recycled content into our polymer lines and The polymerize the molecule in line and repolymerize it and offer a racing with 15 to 25 at least percent ARPED content. So both presentations are very relevant for us to align with our customers. And so those are, again, go hand in hand with our priorities to supply our key customers in the region.

25:07 So that continues as an essential component.

25:12 Thank you. May I ask just a follow-up question there? Are you finding, actually two, are you finding that in the North America, so the majority of this problem is outside of North America, I understand, but there's still a bit of a downturn in the North American market. Are you finding ARPET to be defensive? Are you finding higher level of customer volume and margin loyalty in the product vis-a-vis Virgin, or is it about the same? And the follow-up question number two is, Are you seeing the issue of the PX even in the UK market or is it in other regional markets?

25:52 Yeah, I think again the aspect that we sell for the most part goes to customers that are also very important customers for Virgin PET and again the offering goes goes hand in hand so the discussion that we had with them is it's always on on on on both products um you know we have programs that have our pet content in the two presentations that we provide to them with them and programs with virgin and and again there is a trend and a desire to continue to increase our pet content and we're working on that but i wouldn't Say that there is more loyalty or one or the other. Again, our customers are very committed to PET packaging.

26:47 I think they are very interested in PET packaging brings them many advantages for their business. And the intent is to make PET packaging more sustainable. And again, I see those going hand in hand. In markets, going to the raw material questions like for UK, in UK we would have the ability to source directly Asian feedstock and that's a way for us to deal in that particular market with our raw material competitiveness and we can compete That strategy would be much more cumbersome in other regions because there are more logistics barriers and in the other regions like in the Americas we have our PTA plans and that would be more difficult to even consider. But in the UK in particular we can source

28:03 Asian origin PTA.

28:06 I hope that answers the questions, Nick.

28:08 Thank you very much.

28:11 Thank you, Nick. Our next questions come from Andres Cardona from Citi. Hi, Andres, please go ahead. Hi, good morning, Jorge, Jose Carlos, and Anton.

28:24 Let me ask you about the integrated PT margins and how do you see them performing into the early second quarter? And also you may provide also some short-term color about what's happening in volumes or what to expect in second quarter. Thanks.

28:42 Yeah, I think the, you know, there are still probably very similar levels as the first quarter. I'm talking about the reference margin. There is some compression in In the gap between the China margin and the Asian margin, but relatively small, I would say, generally speaking, still in line with the, you know, with the guidance that we have. As far as volumes, you know, we did see a gradual improvement within the quarter on first quarter. We continue to see that in the second quarter is is gradual.

29:29 And then, and we see also signals for that to continue to improving in the second half. I think the, you know, obviously there is the seasonality of parity racing. And again, these are signs that we expect the volume to, you know, to pick up some. The extent of how much it picks up is still to be determined. But yes, we're seeing some signs of gradual improvement as the year progresses, beginning even within the first quarter.

30:12 Thank you. You're welcome. Thank you, Andrés. Our next questions come from Regina Carrillo from GBM. Hi Regina, please go ahead with your question.

30:25 Hi, good morning. Thanks for taking my question. I have a more strategic question. Do you see any potential benefits coming from nearshoring in the short or medium term for your operations in Mexico or the US or maybe for one of your two divisions? Thanks.

30:45 I think the nearshoring, generally speaking, would be a positive event. mostly for our plastics and and chemicals uh you know that they serve uh some industries uh are related to the industries that would benefit from from near shoring um but yes that that will definitely be a positive factor for us but obviously it will happen gradually over over time yeah perfect thank you for

31:23 Thank you, Regina. We have one last question through the Q&A function. The question is from Andres Lomeli from LCA Capital. And the question reads, given the reduction in CapEx expectations for 2023 to $335 million, will there be a potential for an extraordinary dividend payment?

31:57 Thank you. Yeah, I think that's a very good question. Certainly, our expectation is to take a decision on the second half of the year. There's a potential for an additional dividend. We currently maintain a very prudent leverage. As you saw, we ended up with 1.8 net debt to Evida. and therefore with the improved working cap investment that we're gonna see for this year, the potential upside on working capital, we could see the possibility for an incremental dividend in the second half of the year. That's a decision that certainly we will take towards the latter part of the year.

32:43 Thank you, Jose Carlos. I believe that was the last question in the queue. As always, I'd like to remind you that you can find both a video recording of today's webcast as well as a transcript on our website at alpec.com. Thank you all for participating in Alpec's webcast. Have a great day.