Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q2 2020 Earnings Call

0:00 We are connected to ALPAC's webcast presentation. I would now hand the call over to Mr. Alejandro Elizondo.

0:08 Good morning, and welcome to ALPAC's second quarter 2020 earnings webcast. Please turn to slide two. I am Alejandro Elizondo, company IRO, and I have the pleasure of being joined by our CEO, Depe Valdes, and our CFO, Jose Carlos Pons. This presentation is divided into two parts. First, Mr. Valdez and Mr. Ponce will provide commentary on Alpec's overall second quarter 2020 performance, as well as an update on relevant events. Afterwards, we will move on to the Q&A session. Let me remind everyone that the information discussed today may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, And the company cautions the market not to unduly rely on these forward-looking statements.

0:56 Alpec undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's webcast presentation is being recorded and will be available on the company website at www.alpec.com. I will now turn the call over to Mr. Pepe Valdez.

1:17 Thank you, Alejandro. Good morning, everyone, and thank you for joining us today. I hope you are all staying healthy and well. Turning to slide three, I would like to focus on three key elements that we believe are the main themes for this quarterly period. First, the company has continued to surpass expectations, particularly on sales volume as we transition to a post-COVID-19 environment. APEC's strong financial performance is supported by solid business fundamentals, which we will further explain in this presentation. And finally, we continue to carry out our strategic growth plan to clearly identify catalysts and a capital-effective approach.

2:07 Let's begin with APEC's performance during the COVID-19 pandemic on slide four. Before I go into the details, I would like to personally thank each and every one of our more than 6,000 employees who are the heart of our company and who keep our economy growing. These individuals come to work every day with a clear goal in mind, to bring our customers the products they need to supply of essential goods, such as bottled water and packaged foods as well as urgent medical supplies such as face masks and medical gowns.

2:52 Rest assured that your safety is our first priority and we will continue working alongside you to maintain safe working conditions. I could not be prouder of you and I thank you for your dedication. The impact of COVID-19 pandemic on our business has not changed significantly during the second quarter. is three main effects have been the weakening of crude oil and petrochemical feedstock prices to historical lows in April, resulting in both an inventory loss and negative raw material carry forward effect. Higher than expected integrated pet margins on a global basis as a result of a tighter supply-demand balance and continuous strength in the food and beverage, hygiene, and medical industries, which translates into solid demand for our products.

3:52 Let me take a moment to go into more detail on a topic related to pet demand. We have all witnessed how the general population has become increasingly concerned with safety and hygiene. As a result of this new focus, we believe pet has gained market share in the food service category as fountain dispensers are being replaced by pet packaging. This fundamental shift in behavior has been accompanied with a call to action to strengthen pets' circular economy. As a leader in the recycled pet segment in the Americas, ALPEC is fully committed to supporting initiatives aligned with achieving higher recycling rates.

4:38 We believe that choosing pets and properly disposing it is the best alternative to fight climate change within the packaged food and beverage segment. At this point, I would turn the call over to Jose Carlos, who will go into more detail regarding our financial results.

4:59 Thank you, Pepe. Turning to slide five, Alpec's performance continues to be strong despite the ongoing pandemic. This quarter, comparable EBITDA excluding temporary raw material pricing effects improved. This quarter, we had a strong free cash flow generation as we reduced our working capital and rationalized our capex. And this quarter, our liquidity improved and our net debt was reduced. On slide six, you can see that comparable EBITDA, excluding raw material carry forward effects for the second quarter, improved by 1.4% to $149 million. was largely due to the combination of high volume and an increase in margins from the polyester segment.

5:44 We believe that comparable levidad, excluding the effects of raw material carried forward, is a figure that best explains Alpex operating performance, as it is based on the operating fundamentals of the business, volumes and margins, while excluding temporary effects from feedstock price changes, which tend to average out to zero over a longer time frame. is particularly important to judge Alpex performance in a quarter such as this one due to the significant variations in feedstock prices we experience. Moving on to slide seven, average Brent crude oil paraxylene and propylene prices declined to historical lows this quarter before initiating a rebound in May.

6:29 This price reduction resulted in a non-cash inventory loss of $42 million and a negative raw material carry forward effect of $39 million. Turning to slide eight, comparable EBITDA was $110 million and reported EBITDA was $74 million, 13 and 33% lower quarter on quarter, mainly due to the increased inventory loss and raw material carry forward effects we just discussed. Breaking down results by key segments, Polyester comparable EBITDA excluding raw material carried forward rose by 9% quarter-on-quarter. Likewise, integrated Asian polyester margin increased by 13% quarter-on-quarter due to a tighter supply-demand balance.

7:20 We had strong volume performance this quarter, and although it declined by 4% when compared to record volume seen in the first quarter, it remained above our guidance. The increase to margins more than offset the lower volume, contributing to our performance this quarter. Meanwhile, plastics and chemicals comparable EBITDA was $46 million, a decrease of 7% quarter-on-quarter due to polypropylene margins remaining high since new capacity in North America has not yet started operations. As lower EPS demand from the construction segment where it is used as an insulation, and higher EPS margins as the starting prices decline.

8:08 However, this margin increase was not sufficient to offset the 19% decrease in volume in the PC segment. Finally, I'm turning to slide nine. OPEC has generated $118 million in free cash flow to date this year, and it's currently $189 million above original expectations. The company has placed a strong emphasis on maintaining financial stability and improving its free cash flow through several actions which include a reduction of $127 million in networking capital this year from improving inventory levels as well as supplier and customer credit terms, among others.

8:54 A strong focus on optimizing CapEx which stands at $42 million year-to-date, 61% lower than last year, and $92 million below our estimates for the year, and the suspension of our $81.6 million dividend payment. It is important to mention that the board can review the decision later in the year once the current situation stabilizes. Finally, regarding liquidity, Apex improved its cash position to $610 million, while retaining $1.4 billion in committed and short-term credit lines. Thank you for your interest. I will now turn the call back to Pepe for final comments.

9:42 Thank you, Jose Carlos.

9:44 If we could turn to slide 10, the final item I would like to highlight today is related to our growth strategy. As Jose Carlos discussed, Alpec has been able to post strong results, improve its free cash flow, and increases liquidity amid the COVID-19 environment. Meanwhile, the company has not taken its eyes off the execution of its growth strategy. In a recent perception study conducted for the company, investors and analysts were clear in the sense that they want to see Alpek provide more detail regarding his long-term growth strategy. In response to that, we would like to take a moment to review what we call our strategic pillars, as well as the key catalysts that comprise each of them.

10:39 Our first pillar is to strengthen the core business. At Alpek, we continually strive to optimize our operations and extract as much value as possible from the assets in our portfolio. During the first half of this year, we embarked on a transformative global cost reduction initiative. This first phase of the project concluded last month as we identified more than $100 million in preliminary savings opportunities to be captured over the next few years. The most impactful opportunities are related to Deployment of our state-of-the-art technology across Alpex production sites, energy efficiency, SG&A savings, and digitalization of key business processes.

11:30 Another notable catalyst related to this pillar is the improvement or increase of more higher-value added products in our portfolio, such as polypropylene copolymers. which have higher barriers to entry than commoditized BP and also command better margins. Moving on, our second strategic pillar is fostering a circular economy which stresses the importance that ALPEC places on sustainability. The renewal appetite on further improving recycling rates in countries like the US aligns perfectly with ALPEC's commitment to helping our customers reach their self-imposed minimum recycled PET content goals. Our aim is to participate within the recycling value chain in a way that allows us to produce our PET in our customers' preferred formats, take advantage of our existing virgin PET facilities, and make capital-effective investments in this segment.

12:40 We have also taken an active role in supporting increases to recycling infrastructure through our participation in associations like the Recycling Partnership. Finally, ALPEC is also focused on developing biodegradable alternatives for the other products in our portfolio, such as EPS and polypropylene. Our third pillar, appropriately named, is strategic and focused growth. Altec has built a reputation for investing in projects that provide an attractive financial return, as well as a strong strategic value. Such was the case with our recent acquisitions of the PTA and PET sites in Brazil and the UK, which in addition to being financially attractive, more value from the integrated polyester chain.

13:38 ALPEC will continue to actively evaluate opportunities that meet these criteria, while capitalizing on our strong balance sheet. Finally, please turn to slide 11. Looking forward to the second half of the year, ALPEC outlook remains positive. During June, A. George a judge overturned an anti-dumping determination that stated pet imports from Brazil, Indonesia, Pakistan, South Korea, and Taiwan into the USA did not harm local pet producers. As such, the ITC will be reviewing its investigation and providing an updated decision in the next quarter, which we hope will be favorable.

14:30 Regarding business fundamentals, Polyester volume is expected to be resilient, and plastic and chemical volume figures from June suggest that a recovery is already underway for the apparel, automotive, and construction segments. The company will continue to monitor these and other variables and will provide updated guidance as soon as reliable estimates are available. Let me close by thanking you for your ongoing support and hoping you stay safe. I would now like to open the call for questions. Operator, please instruct the participants on how to place their questions. Ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad at this time. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment.

15:28 One moment while we poll for questions. Our first question comes from the line of Luis Carvajal with UBS. You may proceed with your question.

15:40 Hi, Pepe. Jose Cardos, Alejandro. Thanks for taking the question. Hope you and our PEC team are safe. Very glad to see the strategy pillars. I have three questions here, if I may. The first one is regarding capital allocation, trying to get a bit more. You mentioned, I mean, Pepe, and the recent acquisitions that you made in Brazil and the standards. So I would like to understand a bit more the capital location strategy and how Corpus Christi investment decision will play out. And if you also can comment on this question about dividends decision and then towards the end of the year, what would drive you to take the decision in order to pay dividends or not, that would be helpful.

16:27 The second question is regarding the PET business. You included basically CTEP and SWAPI and UK plant, and we didn't see significant organic growth in volumes. And as far as understood, utilization rate seems stable, so just trying to descend a bit better on the PET side volumes. And third, if you may comment on the PP side, Braskin has a plan that is likely to actually, I don't know, impact the market with additional capacity. So just trying to get a bit more sense on what you're seeing on the polypropylene side. Thank you.

17:10 Well, first of all, in terms of CAPEX strategy, and in particular, I think your question was related to CCP, As you recall, last quarter we made an announcement that the investment cost of the CCP side had increased beyond our original expectations and that we were going to take a pause to review the project and reduce the investment cost. At this point in time, I don't have much more information Given the COVID-19 situation, we have not been able to advance in that particular decision. But certainly, let's say we do believe that some of the new developments might be favorable in terms of helping us improve the cost of the project.

18:14 You remember that I mentioned also that the most important change in the cost of the project had been related to labor costs, construction, I mean, engineering, modern engineering construction costs. And at the time, it was, you know, a lot of, very difficult to find labor. So for that reason, both the cost and the quality of labor that you could find was not the best. I think after everything that has happened, and particularly with the impact now to the oil and gas sector, I think this particular factor of construction costs in terms of price and availability should have improved significantly. But as I say, as of right now, I cannot give you much information because we have being, as I mentioned, on hold until this COVID-19 situation improves.

19:20 That probably will hopefully answer your question. In terms of dividends, I think the situation for dividends, honestly, we mentioned also last quarter that we were quite optimistic in terms of the volume. I think the biggest uncertainty for us three months ago, and even today, is on the volume going forward. That is really the biggest factor. And fortunately, as we explained, the performance of particularly with polyester volumes in the second quarter was better, significantly better than what we were expecting. On the other, plastics and chemicals, you saw we did suffer a little bit in volume, particularly, I would say, in the month of April.

20:12 So April was a very tough month. Then May, a little better than April. But we are now very, very hopeful also because June turned out to be better than expected, and July, seems to continue with the levels that we saw in June, and hopefully we will continue to have some increases in August and September. So again, I think we have to feel a little bit more comfortable in terms of, particularly as I mentioned, the volumes going forward so that we can at least recommend to the board what the outlook of the company is and they can make the right decision.

21:00 But certainly, it's an issue that is still under consideration. You mentioned about paid business, the volumes. Well, again, for all of us, I think this has been sort of a surprise. We had a very strong month in March. Actually, I think I mentioned it was a record month for our company and it was very, very strong At the time, we knew that there was a lot of stockpiling effect. A lot of people were buying in anticipation to the lockdown. But again, April came down a little bit, May rebounded, and June rebounded again. So June volume was very close to March.

21:46 And we see July very similar to June. So again, I... I would say that the results in terms of pet volume have been better than our original estimates. And I believe there are a couple of reasons for that. I think on the one hand, particularly the first five months of the year, we saw a decrease in imports into the US. Of course, related to the COVID-19 in Asia, a lot of these locations or disruptions in the production and logistics. In China in particular, in other countries. So lower imports has been a factor in the strength of the volume.

22:34 And the other factor that again sort of has been important was the fact that particularly in all of these food service chains, you know, that traditionally, or where traditionally, most of the drinks are served by fountain. What's now happening, a lot of these chains move to take-out, and in take-out, they normally, of course, they cannot use fountain in take-out, so they normally turn out to bed for all of those all of those purchases.

23:21 So again, they have increased. Now as they come back, also you can still see that PET bottles or beverages serving in PET are more prevalent, more normal than before. So I think that has probably been the biggest improvement. On the negative side, we were very concerned with the fact that convenience stores, particularly in particularly gasoline retail sector. As people stop driving their cars, we would feel a significant impact because a lot of volume is also sold in those gasoline convenience stores. And perhaps that was the situation in April.

24:09 As I mentioned, we saw a slowdown in April. But I think, again, it has recovered very quickly. Gasoline demand has gone up very fast, and and we don't feel any negative or any weakness in that sector today. So again, overall, we are quite optimistic on the PET volume for the remainder of the year. Eventually, of course, the fountain drinks will return to normal, but again, at least for the next couple of months, I think that we will continue with strong volumes. And finally, regarding your question about PP margins of the impact of Braskem new plant, look, we are assuming, and it's included in our forecast and in our budget, that there's going to be a little bit of weakening on the margins of this new plant to start.

25:16 But again, number one, I think COVID-19 has delayed, in a way, the start of the plant. And in fact, I will mention to you that four producers in the US have announced margin increases or price increases for polypropylene starting next month, in August, of $0.03 per pound, which is a lot. Again, the possibility of weakening of the margins certainly is there, but it might be certainly a little bit later. And again, there are signs of strength in the margins as we speak. Okay, very clear. Thank you very much.

26:09 Our next question comes from the line of Alejandro Trebellis with Credit Suisse. You may proceed with your question.

26:17 Hi, APEC team. Thanks for taking the question and the results. I just wanted to ask, and thanks for providing the disclosure on the growth initiatives and the details. I would just like to know a little bit on how you prioritize, how you think about prioritizing these growth initiatives which are more short-term, which we could see in the longer term. How resource intensive do you think each of them could be or how many resources, how much resources do you think would be required? And my second question is just to confirm, did you say that volumes were down 19% or 90%? I didn't catch that.

27:03 Your second question was which volumes were down? EPS. EPS volumes, okay. And, yeah. Okay.

27:15 Well, again, in terms of priorities right now, I would say our priorities are in the first two pillars of our strategic growth plans that I mentioned, which would be, of course, cost reduction initiatives, although a significant portion of those do not require big investments. So those strategies will be prioritized. Some of the projects do require investment, and we are looking at those very carefully. But again, I think the biggest priority for us right now has to do with the circular economy.

28:11 Recycling. I think it's extremely important for us to finalize a lot of the ideas and a lot of the capacity in the RPED segment so that we can be ready to meet the demands of our customers. Those would be the projects that we are prioritizing. All of the RPED projects are really the highest priority for us right now. In terms of future growth initiatives and again you know in which would be the third pillar I think here we're going to be somewhat depending also on I would say M&A opportunities we are not planning any significant organic growth within our portfolio and other other than when this organic growth comes with a significant cost improvement.

29:14 So for growth, I think in that segment, it will be mostly M&A. And of course, that's more difficult to forecast or to predict. But we will be also looking at that when the opportunities arise. And then you mentioned about the EPS volume as well. EPS volume suffered a lot again in April. Recovery in June was almost back to normal. And again, July, August, I would say the EPS volume on a global basis is approaching 90% of the pre-COVID sales. So we're relatively close to normal and the biggest segment or the biggest weakness has been in the construction segment and in particular construction segment in Mexico.

30:20 In the U.S., we are right now, our sales volume is pretty much on target. So the biggest reduction will be in Mexico, particularly construction segment. The maquiladora sector, the packaging sector, has been very strong. Particularly, it resumed very strongly in June, July. Seems like a lot of the exports are starting to go back, particularly to U.S. So that is very strong sector. So, again, construction sector in Mexico is the one that is faltering a little bit.

31:00 And just to complement that, Alejandro, I think there might have been something that didn't come across on the line. We were talking about total P&C volume, and that was down 19%, not 90%, but it's for the total category.

31:16 Okay, very clear. Thank you. Our next question comes from the line of Nicholas Lipman with Morgan Stanley. Thank you, and we'll proceed with your question.

31:29 Thank you very much, and good morning, gentlemen. Thanks for the call and for taking my questions. Just two questions here, if I may, on the circular economy, and thank you for providing more details there. So you have what appears to be a carefully phrased a sentence there where you say you're going to follow your client in terms of RPET. So most of your clients are looking at somewhere in the neighborhood of 25% by 2025. Should we think about anywhere from 300,000 to 500,000 tons of RPET within your capacity over the next four years? And can you give us a sense of the capex levels that you would be thinking of?

32:15 Would that be So the three to five hundred million dollars is that ballpark the way we should be thinking about it. So that's question number one. Question number two is also circular economy related. You mentioned some of the biodegradable products. I was wondering if that is something that you could provide a bit more details. You don't mention bottles, but if you have any initiatives there in terms of the agricultural products that you have. What what could be you know, when would we start seeing seeing more in terms of sort of real numbers? Around that line item.

32:51 Thank you very much Thanks, Nikola Your question regarding The circular economy or other recycling it you're basically right that that's more or less the range we're talking about 300 to 500 thousand tons But again, let me just explain when I say we are sort of following our customer needs because it really changes from country to country. In some countries like the U.S., pretty much our customers have no recycling over there. But when you turn to Mexico, for example, in Mexico our customers are close to being self-sufficient in recycling.

33:39 You know, ARCA has Petstar and FEMSA has their own plant also in Toluca and their plans for them to build another one together with somebody else. So really, perhaps the volume would be on the low side of your range as a result of that. As a result of the fact we are not the only ones that are growing in recycled PET. So that's why we have to take into consideration the supply-demand situation and make sure we do not over-invest. And the problem of over-investing at the end of the day is you must be very aware that the critical factor for recycling volume is the availability of used bottles.

34:36 So the collection is very, very critical. And so we want to be, on the one hand, aware of the needs of our customers, aware of what other people are doing, in many cases the customers themselves, and also aware of the availability of feedstock. Because otherwise we could create a situation which would be very negative for the whole market. But your numbers, again, are pretty much online. In terms of the investment, we are finalizing that, but I would say we are working, as I mentioned, very hard in trying to reduce the investment as much as we can, and that might be done through alliances with some other players, for example. That might be done, I mentioned also, that might be done also. In some cases, we might be taking advantage of our own virgin facilities, pet virgin facilities.

35:44 So I would not like to commit to a number now, but it's lower than the numbers you mentioned.

35:54 And again,

35:57 also assuming there's a lot of, for example, in Mexico, it's a lot of plants already built that actually are producing a lot of flake and do not have a market for it. So we're going to have to take that into consideration. In terms of number of tons, you are completely right. In terms of investment, we see some opportunities for the investment to be a little bit lower than that.

36:22 Got it. Is anyone else making... So it looks like you made a decision that you want to do The Flake To Peloton The Flake To Bottle Technology So That Seems To Be A Decision That Has Been Taken Within The Last Sort Of Triple Month Are You Aware Of Anyone Else Making That Move In A Significant Manner In Mexico I Think The Majority Of The Capacity That I Have Seen Is Flake To Bottle Would You Be One Of The Have you seen anyone else doing the deflate to pellets methodology?

37:01 Yeah, well, I think the only ones that can do that is probably the pet producers. The pet producers, exactly. Because the other ones, they need an SSP, so we don't need it because we do have available capacity. So I think the existing virgin producers are the ones that have that capability. And we, as you are right, we've analyzed that very deeply. And we have concluded that, yes, a significant portion of our ARPED could be produced that way.

37:38 We have found a way to leverage our virgin capacity. So that makes it, as Pepe indicated, the most efficient way in doing and committing to the volumes that we need to do.

37:50 And I will mention something else, Nicolai. In our decision to go that route, it's very important also the feedback from our customers. And again, that's why I mentioned all of these decisions have to be very well coordinated with the customers. Many of our customers have indicated to us that that is the preferred way of using RecyclePair. It simplifies a lot their operations. They don't have to have that many silos and they don't have to be blending products. They just take the product as it is and, you know, in the same silos and it's only one product, no blending, no risk of mistakes. So that's also an important consideration.

38:39 On the one hand, lower capital cost. On the other hand, the, let's say, practicality or the preference of our customers. Those two factors are the ones that have influenced our decision. And in terms of biodegradable PPE and EPS, I would like to say that we are working and relatively optimistic of some of these developments, but I would like to leave this question for a later date so I can give more specifics. And we can also talk, another interesting problem that we are developing is, as part of our Univex operation in Caprolactam, is the organic fertilizer.

39:32 We have an extremely interesting problem that we have developed. We already built a small commercial plant, and we're just waiting for permits from the Cofepris here in Mexico from the authorities to start selling that product. And this permit has been delayed significantly as a result, again, of all of the COVID-19 situation. So I would like to wait perhaps until the next quarterly meeting to talk about that. But yeah, some of those problems, particularly this last one, looks very promising. Got it. Well, thank you very much. Our next question comes from the line of Leonardo Marcondes with Itaú BBA.

40:21 You may proceed with your question.

40:25 Hi, guys. Thanks for taking my questions and I hope you're safe. So my first question is regarding the five-year growth plan that you guys mentioned on the release. I was wondering if you could provide more details on the part where you mentioned investment in higher-value products and a review of Existing footprint. I mean, uh, what have you have been done so far on these phones? And if you guys have already revised it and location that it could, uh, be likely from, uh, my second question is regarding the guidance for these years. I know you guys mentioned, uh, that you are like, which provided also have more reliable estimate. But I would like to know if you guys have any estimate or target on our planning for our providers. Thanks.

41:21 Leo, quick clarification. You asked for more detail on the strategic plan related to which specific part?

41:30 On the strength of the core business. More focused on the investment in higher value products and revision of the existing footprint.

41:43 Understood so just to clarify you're asking for a little bit more detail on the higher value-added products like the propylene ethylene copolymers Okay.

41:52 Yes, that's right Perfect No, no, no, I think On that question again, I would like to ask for some time in order to be able to present a more clear picture because a lot of a lot of these ideas are still ongoing and And again, same as with the last question about Nicola, I would like to perhaps review this for the next quarterly meeting, if you don't mind. And in terms of the guidance, look, the guidance, we have, again, at this point, we've decided not to come up with guidance for the reason that we still, I mean, We still have some uncertainty in terms of the famous second wave or potentially second wave. And we don't want to, let's say, move ahead of ourselves. So we want to wait until we have a little bit more clarity on what's going to happen on that front.

43:03 And on the other hand, the other very important issue regarding guidance We have to do with what's going to happen with the prices of our raw materials and crude oil. Potentially, things go well. Crude oil recovers and margin of raw material recover. Well, we could have a very significant, let's say, positive impact of carry forward and inventory devaluation. So that part is also very difficult to calculate or to estimate. What I can say is that other than that, I believe our, let's say, fundamental results or our results without those variables are going to be very close to our guidance, original guidance for the second half.

44:03 Okay, that's clear. Thank you. Our next question comes from the line of Vanessa Quiroga with Credit Suisse. You may proceed with your question.

44:16 Thank you. Hello. Good morning. My question is regarding the scenarios that you see for polyester spreads and polypropylene spreads for the second half of the year. And in specific for polypropylene, how low do you think spreads can go once the new plant becomes operational? And the second question that I have is regarding the return that you would expect on your different growth strategy initiatives. Thank you. Okay, all right.

45:07 Well, relative to polyester spreads, again, I think basically we expect those to remain for the second half of the year to remain slightly above our guidance level. And we believe that we're going to be able to keep that. And in case of polypropylene as well, as I mentioned, the delay of the Braskem facility together with this recent price announcement makes us believe that we might also have a relatively steady PPE spreads for the remainder of the year.

45:53 I think, so for the time being, we believe we are going to be very stable not only in volumes, but also in margins. And that's why I mentioned, I think our guidance is going to be very much in line with the original guidance. And in terms of your second question, your question is on, if I can understand, return on the strategy.

46:25 You are meaning... Yeah, return on invested capital. for the different projects in the growth strategy.

46:36 All right, excellent, excellent. Look, Vanessa, what we are seeing in our preliminary analysis of the many different projects is most of the projects are in the range of, I would say, around 15% internal rate of return, which is the way we normally value projects. We value those in terms of after-tax. after-tax internal rate of return. And most of the projects on labor, of course, it's asset, return on asset. And most of the projects that we're analyzing today are falling into that range, including, by the way, the recycle projects, including those. So that would be more or less the type of returns we are expecting when we get.

47:33 Okay, Pepe, that's very interesting. And what kind of prices are you assuming for the recycled polyester in this assumption? Can you repeat the question, Vanessa? What type of what, Capix?

47:49 Prices? Or recycled pets? Okay. Or recycled pets.

47:57 Look, Vanessa, what we are assuming, and this is, of course, a very good question, by the way, because part of the problem with the development of recycled PET in the last four or five years has been the fact that our customers have been asking for parity prices with virgin PET. They want to have similar prices and they have on the virgin pet and of course that under the new circumstances the new prices of crude oil and also with the new margins across the chain the new margins of paraxylene the new margins on glycol the new margins on PTA and PET to have recycled a prices similar to version prices is virtually impossible so going forward we believe the mechanism to price the RP is going to be more like a cost plus formula where you have the basic cost is the cost of the bales you have to factor in the cost of the bales and then

49:30 you have to add other or the cost of production or conversion. And I think most of the formulas going forward are going to be in some sort of fashion like that, plus plus. Whether those will be in parity with virgin or not, very difficult to establish. My impression is over the next couple of years, virgin pet is going to be much lower than prices of recycled pets. I mean, today, if you want me to give you a number, today, for example, you know, you have, and again, depending on which markets you're talking about, some markets have a much wider gap. But let's say in our markets, in NAFTA, I think a 10 cents per pound differential would not be out of the question.

50:26 I think, I mean, ARPET being 10 cents per pound higher than Virgin. There are other markets, just to give you an idea, where today we are seeing prices of ARPED $400 or $500 per ton, so $0.20 per pound higher recycled than virgin, in Europe, for example. But again... That's very... Go ahead, sorry.

51:04 Yeah, no, what I'm saying, that's why I think your question is very relevant. In the past, it was more or less around vision. Now it's going to be, I think, a premium, which could be significant depending on the region. And again, until the, I mean, I was reading the other day, you probably saw it as well, that now people saying that crude oil price is going to go back to $150 per barrel, you know. If that happens, of course, it's going to be different. I mean, there shouldn't be any premium of RPED versus Virgin. But in the, let's say, in the base case, where CUDO prices remain subdued, perhaps going back slowly to $50, $55, I think you're going to be having a premium of RPED over Virgin.

52:06 And regarding this cost-plus formula for recycled PETs, can you confirm this with a high percentage of your customers that this can work? Well, of course. Of course. Yeah, of course.

52:28 We can do nothing without it. The consultation with them, yes. Of course, I would say they understand the different circumstances today than in the past, and they realize that if they want to meet their content requirements, their recycled content requirements, they have to pay a reasonable price that at least covers the cost of producing the ARPED. No, again, I think that has been a big improvement versus the past. In the past, it was impossible to talk of a premium. Today, they are willing to recognize that under certain circumstances, it has to be a premium.

53:17 Excellent, Pepe. And if you allow me, sorry, I go back to the question about polypropylene spreads. And my question was actually, how low do you think polypropylene spreads can go once the brass can plant becomes operational?

53:36 Well, that's I think a good question, difficult for me to answer. But I would say polypropylene spreads could go down two to three cents from where they are today, two to three cents per pound.

53:57 Okay, Pepe, thank you very much for all the answers. Our next question comes from the line of Regina Carrillo with GBM. You may proceed with your question.

54:11 Hi, good morning. My question is about the long-term growth strategy. You mentioned the possible monetization of some biofertilizer products and a CO2 participation plant. We go through these two projects to detail how much money we'd be expecting. Do you have some guidance on that? What was, Regina, what was the first project you were interested in?

54:40 The biofertilizer products that you mentioned. Yeah. You were talking about CapEx?

54:49 Yeah.

54:51 Look, the... Biofertilizer product has a relatively low capex. Well, if you want to, the high capex was part of all the research, but that has been going on for like five years, so that has already been done. Right now, once you have the basic formulas, let's say, the capex going forward is not that important. And what is very important in this bio, I mean, in this organic fertilizer, is that there is not really a lot of competition there. And for that reason, the market can pay very attractive prices and margins.

55:42 So, I mean, it's, again, it's not an issue with CapEx. CapEx are relatively small, and you could enjoy good margins in that product. And I will tell you something else. I mean, volume is, I mean...

56:01 The market's quite large.

56:02 It's very, very large, the volume. So again, once we... That's why we need these permits to get going. And in fact, as I say, we already built a small commercial facility and just waiting for the approval.

56:23 And...

56:25 We believe, again, that once we have that, we've seen a lot of interest from customers. And, again, the volume could be very, very significant. So that could be an important business. Okay, thanks. Our next question comes from the line of Gilberto Garcia with Barclays. You may proceed with your question.

56:59 Hi, good morning. Thank you for the call. You mentioned in the press release that the energy package process in Mexico is coming to a close and that you expect to recover some of the funds related to secure. But I just want to confirm that this relates to the funding that you provided for the plans to continue operation. And if so, is there a possibility that you could recover some of the unpaid commercial balances that you had with the company prior to the bankruptcy? And on the same subject, is there anything you can say about the possibility of you getting control of the plant following this process?

57:51 Thank you.

57:57 Well, let me ask Jose Carlos to talk about that. He's certainly more following that on a day-to-day basis.

58:05 Yeah, thank you, Gilberto. Thank you, Gilberto. Yes, well, as you know, the M&G process, you don't know, but the process is going well. Well, we have had some delays because of the COVID situation. There's been a lack of jurors that could take the company out of the Concurso Mercantil that it's ongoing, but it's going well. And yes, we mentioned that we will be recovering money by the end of the year. We're expecting around $30 million. That could be the money that we could recover this year. And for the following years, we will recover the remainder of our money. At this point, I would have low uncertainty that we can recover what we are owed by the company. Of course, not 2020.

58:55 throughout the next following years to our understanding the company is operating very well. So have positive cash flow.

59:07 As we mentioned before, the pet market or the pet volumes are okay, are good. So the company has been operating very close to capacity over the last months. Yes. And so, yeah, the company is doing well. With no other questions in the queue, I would like to turn the conference back over to Mr. Elizondo for any additional or closing remarks.

59:47 Thank you, operator. I would just like to thank everyone for participating in today's webcast and reiterate Pepe's message to stay safe. Please feel free to contact us if you have any follow-up questions or comments. Ladies and gentlemen, that does conclude today's webcast. Thank you for all joining us today.