Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q3 2022 Earnings Call

0:00 Our CEO, Pepe Valdez, and our CFO, Jose Carlos Pons. This presentation is divided into two parts. First, Pepe and Jose Carlos will comment on Alpec's third quarter performance, recent events, and our outlook for the remaining months of the year. Afterwards, we will 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. Actual results may differ materially, and the company cautions the market not to rely unduly on these forward-looking statements. Alpek undertakes no obligation to publicly update or revise any forward-looking statements, whether it is a result of new information, future events, or otherwise.

0:51 I'd like to remind everyone that today's webcast has been recorded and will be available on our website at alpek.com. I will now turn the call over to Pepe.

1:02 Thank you, Antoine. Good morning, everyone, and thank you for joining us today. I am very pleased to mention that in these last few months, APEC had yet another successful quarter. Third quarter 22 was the first quarter in which with the new PET sheet and resin business located in Oman was fully consolidated and we are very pleased with the seamless transition thus far. We have already seen synergies between this and our existing business. and we look forward to continuing to integrate best practices towards the future. From a financial perspective, this new business has experienced strong results, leading Alpec towards the highest quarterly comparable EBITDA in its history.

1:52 Let's start off by reviewing the main topics we will cover today. First, APEC financial performance was slightly above our expectations for the third quarter, which Jose Carlos will review in greater detail later in this presentation. And then we will discuss APEC's progress towards product circularity and outlook for the rest of the year. Let me provide some context for the results. The quarter was marked by a tighter economic environment and elevated energy prices, which primarily affected conversion costs in the United States, Mexico, and the United Kingdom. At the same time, Asian integrated polyester reference margin averaged $400 per ton for the quarter. higher than expected and only two percent lower than in the previous quarter with the spread between chinese and asian margins narrowing to 77 dollars per ton however it's worth noting that reference margins have begun to normalize reaching an average of 356 dollars per ton in september meanwhile polypropylene reference margins declined to an average of 34 uh cents per pound 13 percent lower quarter on quarter mainly due to to following uh weakening demand towards the end of the quarter leading to higher inventory levels in the industry and second an addition of polypropylene

3:23 capacity that is coming in in north america also in north america eps average reference margins remain strong during the third quarter At this point, Jose Carlos will take over and delve into more detail regarding the specific impact these changes had on the financial results.

3:47 Thanks, Pepe. And thank you all for being here with us today. I would like to highlight some of OPEC's main achievements during the quarter. Overall volume increased to 1.36 million tons. We reached the highest ever quarterly comparable levita of $424 million with both the polyester and plastic and chemical segments posting their best figures ever as well. Levers remain at 1.2 times. Delving deeper into volume, Alpec reached 1.36 million tons in this period, 8% higher than in the previous quarter, largely due to the recently incorporated pet chip and resin business. In the polyester segment, volume was 1.1 million tons, 10% higher quarter on quarter.

4:37 In plastics and chemicals, volume was 2% lower quarter on quarter due to the fact that there was a slight decline in polypropylene demand and a maintenance at one of our EPS facilities. Moving on to raw material price dynamics, average spot print crude oil price decreased to $99 per barrel, 12% lower than in the previous quarter, largely due to a tighter macroeconomic environment. US reference paraxylene prices decreased by 18%, in line with crude oil. In plastics and chemicals, propylene prices declined, averaging 47 cents per pound, a 23% decrease when compared to the second quarter.

5:23 Switching over to the EBITDA breakdown for the quarter, we can see that overall comparable EBITDA reached a new high of $424 million. This was 15% higher than in the previous quarter, primarily due to better than expected margins for pet and EPS and the newly incorporated volume from the pet business. Meanwhile, reported EBITDA was $306 million. 40% lower quarter on quarter. This results included a non-cash inventory loss of $70 million and the negative carry forward effect of $46 million. If we look at results by key segments, Polyester Compatible Levidad reached $261 million, 20% higher quarter on quarter and 144 higher year on year, making this the strongest quarter ever for this segment.

6:21 This was due to solid volume demand and the resiliency of the Asian polyester reference margins, which remained higher than expected, averaging $400 per ton, 26% higher year-on-year. In plastics and chemicals, comparable EBITDA set a new quarterly record of $158 million, an 8% increase quarter-on-quarter and a 28% year-on-year. This was mainly due to the improvement in EPS business. With regards to free cash flow generation, networking capital investment increased by $111 million, yet at lower levels than the previous quarter, largely due to declining raw material prices during the quarter.

7:07 CapEx totaled $93 million and was mainly allocated towards scheduling maintenance, as well as a portion of CCP's construction. This all resulted in a negative free cash flow of $6 million. Finally, Alpex net debt increased to $1.8 billion, and last 12 months EBITDA increased to $1.54 billion, resulting in a leverage ratio of 1.2 times net debt to EBITDA. That concludes my comments. Thank you for your attention. I will now turn the call back to Pepe.

7:45 Thank you, Jose Carlos. Let us review some recent events. As per the press release distributed this past August, Alpec announced that its expandable Sterenix subsidiary joined Cyclics, Cyclics International, a consortium-based company that focuses on establishing a circular pathway for plastic recycling. To predictive algorithms and artificial intelligence, Alpek gains access to custom feedstock batches from waste with the necessary chemical and physical properties to ensure their recyclability. Having more feedstock available will significantly support Alpek's EPS projected recycling capacity to achieve its circularity target of increasing its recycling content in select products to at least 30% by 2030.

8:42 It is worth noting that Alpex EPS production is primarily consumed for long-term usage, such as in the construction issue to external insulation properties which seek to reduce the carbon footprint for homes and buildings. However, For the products that have short-term usage, which represent approximately 35% of the sales volume, the company continues to establish its role as a lead in recycling, similar with PET, now through growth in expandable styrenics recycling. Finally, regarding the outlook for the remaining months of the year, the company expects continued normalization for PET as well as polypropylene and EPS margins.

9:38 Volume for both segments is expected to remain relatively stable, only affected by the usual demand seasonality, which is characteristic during the fourth quarter. Additionally, For PET, we expect inventory reductions from some of our customers. Meanwhile, ocean freight prices are expected to continue normalizing towards the end of the year. During the aforementioned, as well as the incorporation of our new PET business and the results we have witnessed so far, ALPEC expects to be in line with its revised guidance figures.

10:23 As always, I would like to thank our team, our customers, and our suppliers for supporting Alpek in reaching new heights. I would also like to thank you, our audience, for your attention here today. I will now turn the call back to Antón to open the webcast for Q&A. Thank you, Pepe. At this time, we will now take your questions. To ask your question live, we will ask to raise your hand virtually. We will call on participants in the order that hands are 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 Alejandro Samacona from Credit Suisse.

11:08 Hi Alejandro, how are you? Please proceed with your question.

11:12 Hi Anton, thank you. Hi Pepe, Jose Carlos. Thank you for the call. Just a quick question regarding the pet contract negotiations. Amid the latest trends in freight rates and the recent slight decline in pet margins for the quarter, what are you expecting for next year's negotiations? And if you can remind us the timing of these negotiations will be helpful. Thank you.

11:46 I would say that certainly in some of the markets that we serve, the freightways have an important impact or consideration. This is for us mostly in, I guess, UK and in South America. Those are the regions where the freight rates have a more immediate impact in our prices. But basically, however, we do have some formulas that take that into account. So we don't probably have to change many things.

12:33 But yeah, the reduction in freight will... will have some impact in our margins in those regions at the end of the day. In the case of North America, as you know, most of our business is contracted on the basis of cost plus, and that cost plus has nothing to do with freight rates from Asia. So in the case of North America, we are not expecting any major change as a result of this freight, ocean freight rate reductions.

13:07 Okay, thank you. And then my second question, if I may, in terms of the dividends, can you share any color on the potential extraordinary dividend, the timing amount and the rationale behind this potential extraordinary dividend?

13:25 I think, Alejandro, what I can share is that the management will propose to the board sort of an extraordinary dividend in the next board meeting, which is early next week. And and of course the board will have the final decision at the end. But I would say, I think it should be an important dividend and it will most likely be paid in November this year. Okay. Thank you. Your welcome. Thank you, Alejandro. Our next questions come from Jacob Kim from Scotia.

14:12 Hi Jacob, please proceed with your question. Okay, maybe, okay. Our next questions come from Luis Carvalho from UBS. Hi Luis, please proceed with your question.

14:42 Hi, Pepe, Jose Carlos, Anton, Alejandra. Thanks for taking the question and congrats on the results. If I may have three questions here, Pepe, I would like to come back on the capital allocation, which is kind of a recurring question from our end. You have been able to generate a good amount of cash. Net leverage is somehow pretty much under control. You were able to announce dividends recently, but also perform some or one acquisition or some acquisitions right so just trying to understand um mid to long term part of the strategy on the capital location um that would be interesting um the second question if i may you made some comments in the in the last slide talking about the um the margins or the volumes that you were expecting for the remaining you know months of the year but if you can share some thoughts on 2023 outlook Thank you very much. Okay.

16:05 I would try to answer your question this way. Looking at volume first, we see volume for next year strong. I mean, we see very stable. We see similar volume next year than what we are experiencing this year. We don't see a lot of change in that in terms of margins. Well, I think in terms of margins, we have been discussing over the last waters that yes, we do expect that there will be some margin normalization. I would say particularly in polypropylene and EPS businesses, we will see some margin normalization going forward. Based on the different demand-supply dynamics in the markets, and also in some cases, particularly in EPS business, also taking into consideration the reduction of the ocean freight rates. Polypropylene prices do not really correlate with the ocean freight.

17:14 But in EPS, ocean freights do have some impact. So we see normalization in both of those businesses. In PET, as I mentioned, we do see some margin reduction, particularly in South America and Europe, as a result of the reduction of the reference margins of PET in Asia. That I mentioned before. And also, in both cases, also, there is going to be an impact of the ocean fragrance. Margins or fragrance, I'm sorry, from China or from Asia to these countries are also coming down or becoming more normal. So, yes, I do. I do expect. So we do expect some margin normalization in those two businesses.

18:07 In PTA, you already mentioned, I think, that North America, we see margins stable next year versus this year. And mind you, that's our largest business in terms of volume. And that would be probably the answer to your question. So in terms of capital allocation, we are assuming Let's say for next year, a continuation, I would say continuation of the Corpus Christi project that will require investment. We are also, I mean, we're at this point in time, we're not considering any new M&A, but as you do know, A lot of times, or most of the times, the M&A are not, you know, planned a long time in advance. It really depends on what opportunities come about. So that's something that it doesn't mean we will not do any M&A. It just means that at this point, we're not looking at any specific.

19:19 There might be a couple of ones that will come to fruition. But we're not including in our budget any of those at this time. And yes, in terms of dividends, we do hope that we will continue to pay an attractive dividend yield. I mean, given that we do have a very strong balance sheet, and as long as we do have that, I think it will be more efficient. It will be an efficient way of using our capital. And again, at the end of the day, you have to, Luis, you have to remember that we do have a balance sheet that has a lot of room for new investment.

20:05 So even as we pay dividends and we continue with existing projects, we do still have capability to continue to grow in new opportunities.

20:20 Okay. Yeah, that makes sense. Thank you very much. Thank you, Luis. Our next questions come from Nicholas Lipman from Morgan Stanley. Hi, Nick. You may proceed with your question.

20:33 Thanks a lot and wow, congratulations again on phenomenal numbers and then to the team and your M&A track record. I just have two questions. One, if you could give us a little bit more of an update in terms of corpus, how that's moving along, you know, the kind of debates related to that when you expect to be up and running. Also, maybe the capex number. The second question I have is more broad in terms of what's the latest in terms of the potential for developing a recycle PET standard like percentages? What is it that would be required for brand owners to call? Is that something that you think the industry is pushing for because it could create barriers to entry from imports? Or is it something that you think has a lower point on the agenda? Again, congrats and thanks for taking my question.

21:36 Okay, Nick, I think in terms of Corpus Christi, the project really started last August. So we've been there only a couple of months. Everything is looking fine. And the idea would be to, you know, to finish construction end of 24, start commercial operation beginning of 25. Those are the numbers we have. We have not changed those numbers for the last three months. I'll be paying a visit to the site next Monday, so perhaps if I have more information, we will be able to share with you. So far, the investment there is relatively small, and I don't know the exact number, but I think we're talking about 300 million, in the 300 million range, over part of the investment.

22:31 perhaps a little bit more than that, 300,330, but that's the number we have for our share of the project. And in terms of recycling a standard product, I don't think that we are yet at that point. I think there's a lot of flexibility from, I think, the brand owners and most of our customers in terms of recycled content. I think all of them, they have a goal, let's say a medium term goal, but it really, at this moment, it really depends now in what region or what country you're talking about.

23:20 And I think the biggest concern of all of the participants in this recycling effort, I think the biggest concern we have now, I would say, is number one, the collection. Collection of used bottles, of bales. That's number one concern. A lot of work going on in different technologies. As you know, the mechanical recycling is pretty well established at this time. But there's also a lot of different routes for the advanced recycling or chemical recycling that are being, you know, you have many different companies working on those.

24:09 So, at this point, I don't think we have yet a standard. Also, there is another way of producing or recycling, which is, and this is pretty much open only for the PET producers, which is what... we we call the spt which is single pellet technology which means that you can feed into our polymer existing polymer lines uh you know recycle pellets up to a certain percentage so so you produce one pellet that has both version and recycle that's another way of moving forward so there are many ways and as i say we're now at a You know, with a lot of flexibility, eventually, I think you're right. There's going to be a preferred I think the biggest issue is how do we increase the collection?

25:10 And not only increase in terms of volume, another very important issue is not only increasing volume, but improving the quality of the feedstock, of the bottles, because that has a lot of implications on the yields that you're going to have. If the product quality is not very good, you're going to have yields in the range of 50% or a little higher. When you have good yields like deposit material, you can move to much higher yields, 75, 80%. So a lot of that is, as I say, is still being, well, you know, it's very fluid at the moment.

25:57 But yeah, but there is a lot of effort. from a lot of people in that field. I think we all take that very, very seriously.

26:07 Thank you very much. And again, congrats. Thanks for the question, Nick. Our next questions come from Andrés Cardona from Citi. Hi, Andrés, how are you? Please proceed with your question.

26:21 Good morning, Anton, Pepe, Jose Carlos. I have two questions. The first is, can you please help me to understand How much are you being able to capture as of today from the reliability premium and the transport cost at your margins and if you expect to see to still see some of these let's say unusual premiums in your 2023 contracts and the second question has to do with working capital it was surprising to me to see this negative flow Given the fact that raw materials were declining, can you please help me to understand what happened there if there is something that is a typical thanks and congratulations for the results?

27:15 No, thank you for your question, Andrés. Let me start with the premium and the ocean freight margins. Well, certainly, as I mentioned, depending on which market we're talking about, let's say the ocean freight As I mentioned, normally in South America and in Europe, the ocean freight is important in determining our prices, although it's not necessarily automatic. It's not that every shipment you're adjusting the price, but it's taken into consideration in the negotiation of the prices. That's true. In terms of the premium, Well, you are right.

28:04 When you have a lot of supply issues, sometimes premium can be better than in other cases. However, again, in our South American and European operations, I don't think we've been changing the premiums. I think mostly the impact has been coming from the ocean freight. So yes, as the ocean freight comes down, we do believe that we're gonna see some, as we call it, normalization of margins, particularly in those markets.

28:52 With regards to your second question of working capital, I have to say you are right. When raw materials come down, well obviously working capital has to come down. The only issue, Andreas, is that there is a lag in that process. It doesn't happen immediately. So so normally would say it takes a couple of months for this, you know, reduction to materialize. And I do believe that we're going to see an important networking capital reduction in the during four quarter this year.

29:32 If I may, Pepe, in September, we also saw we already saw a decrease in working capital. So we're starting to see that that effect.

29:39 Yeah, we had a negative effect. Well, we had a reduction of working capital in September, but we have a positive in the first, in the other two months. Yeah. Yeah. And, and yeah, we want to have, we want to, we should have, we should see the impact more clearly in the fourth quarter. Thank you for your question. Our next question comes from Bárbara Kallstert from JP Morgan. Hi, Bárbara, please proceed with your question.

30:16 Hi, thank you. Thank you for the opportunity and congratulations on the results. Some of my questions have been answered, so I wanted to shift a little bit and maybe focus something else. I wanted to understand a little bit better in terms of your funding strategy for next year for the 2023 bonds. um you have discussed already your capital location strategy but just to understand what you're thinking in terms of refinancing options um for that maturity so that would be number one then the second one um is more specific on the debt collection from the mng in mexico um just to confirm if the funds have already been received And so if you could point out where do we see that in the cash flow statement?

31:01 If not, when do you plan to receive them and also how much is left to receive from them? Thank you.

31:09 I'm going to ask Jose Carlos to actually help me in answering both of your questions. Thank you, Pepe.

31:17 Barbara, thank you for your question. As you know, we have an outstanding bond. Well, first of all, we have an outstanding bond that will mature now in November of around $94 million remaining. That will be basically paid out of cash on hand. We've been fortunate enough to have sufficient cash with us. So we will pay that with cash. 23 will be able to pay that. Well, we're thinking on a financing strategy that will allow us to have some time to refinance that with a long-term debt. We don't believe that the market is ready or it's at attractive rates to issue a bond. So we'll probably use some temporary financing, probably two, three year loans that will allow us to kind of have an opportunistic approach towards refinancing the 2023 maturity.

32:09 And we already have those in place. So we're ready to bridge that maturity and we'll do refinance with a more attractive rate later on. Regarding debt collection, yes, we did collect $22 million. You should see that in, I mean, in our maturities, not in our maturities, in our balance sheet, it should be seen in debt to third parties, debt from third parties. We have been able to recover the entire second lien that we had with M&G. So they've also had a fortunate to be good with margins and the total collection that we have had so far from them is $108 million.

33:01 It's my correction. It's the, we have the hundred and eight minutes are coming.

33:09 Perfect. Understood. Thank you. Thank you, Barbara. The next questions come from Leonardo Marcondes from bank of America. Hi, Leonardo. Please proceed with your question.

33:28 Hi guys. Can you hear me? Yes, thank you. Okay, thank you for taking my question. We saw a huge hike in EPS margins this quarter, right? In your view here, EPS spreads increased more or less 90% quarter over quarter. And that's why the PEC business was able to post such strong results in spite of the drop in PPP margins, right? So, could you share what are your expectations on APS spreads? I mean, here we do not expect those to remain as high as they were in this quarter, but we are also not seeing them going back to the previous levels in 2023.

34:13 So I would like to know if you guys agree with that. And if so, could you share with us what, in your view, has been driving, I would say, this higher EPS spreads in the short to midterm? Thank you.

34:32 Well, I think in terms of the question for this last quarter, I think the fact is that What happened was that prices of raw material fell faster than there were sales prices. So we were able to increase the spread temporarily. But you're right, these margins will tend to normalize as time goes by. And we do believe that we're going to be able to So I don't know, you know, that sort of answers your question. Yeah, I mean, We cannot hear you. Can you speak a little bit louder, Leonardo, please?

35:45 Sure. Can you hear me better now?

35:50 Not great, but better.

35:52 Okay, I can follow up. Thank you. Thank you, Leonardo. Our next question comes from John Baptiste from BBVA. Hi, John, how are you? Please proceed with your question.

36:10 Thanks Anton, IPP, Jose Carlos Alejandra, just two quick questions on my side. The first one on OCTAL. Can you give us some colors on the contribution of OCTAL during the quarter in terms of EBDA? And when you close the acquisition, you also mentioned that you were seeing some opportunities to some synergies on the purchase side. If you can give some comments on this. The second one is in terms of outlook. Thank you very much for sharing your view, very preliminary view on that. For 2023, just to make sure you mentioned that the margins for PET will be stable year on year next year in 2023 from 2022 levels.

36:56 And the last one is in the last code, Pepe, you mentioned that the bottom of the cycle ABDA, you were seeing it around $1 billion. Can you just also confirm that number? Thank you very much.

37:13 Well, relative to that contribution, as you know, we don't disclose specific numbers for the different business units, but I do hope, Jan, that it will be enough for you to say that The octal margins or the octal results were very strong, actually stronger than we had anticipated in our project book. A lot of reasons for that, among others, you know, is the situation of the freight rates. Octal has a A contract for some of its volume or an important portion of its volume, the ocean freight was contracted before the spikes. So they do have that advantage that eventually some point next year that's going to finish.

38:15 So yeah, that has contributed somewhat to the very strong results. But as I said, it's certainly been better than we anticipated. In terms of the synergies, I think the most important synergy for us so far has been we are integrating all of the PET commercial operation with our existing. So I think that's an important opportunity for both of us, for Dal and for Alpek Polyester. So that has been an important, and in particular, I do believe that we will be able to better serve our customers.

39:09 And also, in fact, I think we were short on PET most of last year in North America. And I think the octal opportunity of acquisition will allow us to, as I say, to supply more or better supply to our existing customers. So that's probably the most important, I would say, synergy. And going forward, there's going to be, I think, a lot of synergies. We mentioned before they do have a very, you know, leading technology to the production of sheet that is also allows to produce even at the same time sheet and resin. So I think we're going to be able to also take advantage of that technology in new projects that we have in our different regions.

40:12 So that's the situation. With respect to PET margins, and I do want to sort of be more specific about your question. What I did say about PET margins for 2023 is that we do expect North American margins being similar to last year. Sanchez, Roberto Blanco Sanchez, Jorge Pedro Treviño, Barbara Amaya Sanchez, Jorge Pedro Treviño, Barbara Amaya Sanchez, Jorge Pedro Treviño, Some other part is not going to be perhaps similar to this year. It's going to be lower than this year.

41:04 Hopefully still at a very healthy level. And yeah, the bottom of the cycle of the VBA, yeah, we still believe that the $1 billion is a good number, but I mean, you as you know that's only an estimate that can change depending on so many factors and hopefully also as we are investing in more projects that number you know we should be doing better than that number after the you know corpus christi and some other projects that we have that we're working on start that's like very clear pepe thank you very much Okay, we have one question from Jacob Kim from Scotia throughout the Q&A function.

42:04 And the specific question is, last quarter we were expecting second half to be $330 per metric ton for the Asia PET reference margin. As first half came in at $400 per metric ton, what part of the margin was different? And what bills do you have now hold for the fourth quarter?

42:29 Good question, Kei. I think what happened was basically the fact that margins in Asia kept stronger for at least for the July-August period. But we did see, and I mentioned that in my presentation earlier, that in September, the margins from Asia were already 356. So the average for the quarter was 400, but at the end of the quarter, it was 356. And again, I do believe the 330s is still a good number for the remaining of the year. That's still a good number. We do believe that it was just a delay in the expectation. I mean, it could be 330,320,310. I mean, that range I think is realistic.

43:35 Thank you. We have another question through the Q&A function from Regina Carrillo. from GBM. And the specific question is, besides the decline in raw material prices, could you give us more color on the components of this quarter inventory adjustment and also in networking capital?

44:02 Well, Look, inventory adjustment mostly, I mean, it was a result of over three main raw materials coming down significantly in some cases. The propylene price, I think you saw the last slide, The last number in September, the contract propylene price in the U.S. was 44 cents per pound. And it's coming from a much higher number. I don't remember right now in memory what was the price at the end of the second quarter, but it was significantly higher. And in the case of styrene, the reduction was even bigger.

44:51 I think styling at some point was at the 80, 90 cent per pound range, and right now it's around 50. So those two raw materials had a significant reduction in price during the last quarter. And even paraxylene, paraxylene also had an important impact in price reduction. So I would say a big reduction in those three created this inventory adjustment. Going forward, again, propylene, believe it or not, we believe it's also going to come down in October from the 44 cents. We estimate it's going to be like in the 34 cents per pound, which is unusually or unsustainably low. So we're going to have, at least in October, another reduction. In my last November, December, I don't really know, but it's going to be there. And in case of styrene, we see that price more stable around the 50 cents per pound. I don't see a big reduction there.

46:07 And in paraxylene, actually, we don't have a very good visibility of what paraxylene prices are going to be. be in the fourth quarter relative to the third quarter. And so all in all, what I can tell you is that we don't expect an inventory adjustment in the fourth quarter. We think most of that is already done. We might actually have slightly positive. More likely, we will have a positive inventory gain in this next one.

46:55 Thank you for the question. I believe that was our last question in the queue. As always, I'd like to remind you that you can find both a video recording or today's webcast at Wealth Asset Transcript at our website at alpec.com. Thank you all for participating in Alpec's webcast. Have a great day.