Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q3 2023 Earnings Call

0:01 Hi everyone, welcome to Alpec's third quarter 2023 earnings webcast. I am Antón Fernández, IRO, and here with us today we have Jorge Young, our CEO, and José Carlos Pons, our CFO. Let's begin by reviewing today's agenda. First, Jorge will discuss overall context of the quarter and results, Then, José Carlos will cover Alpec financial performance followed by recent events and outlook for the remaining of the year. And finally, we will open the call for questions from the audience. 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.

0:49 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 as a result of new information, future events, or otherwise. For your convenience, this webcast is being recorded and will be available on our website. Jorge, I will turn the call over to you.

1:19 Thank you, Anton. Good morning and thank you for joining us. Let me start off by providing some context for the quarterly performance. The macroeconomic environment we have experienced throughout the year remains with China's economy impacting the petrochemical industry. In turn, the influence of Asian imports and Asian offers into the Americas persists, particularly for PET and EPS. Meanwhile, Regional market demand remains soft, affected by a high inflationary environment, which has deterred consumer spending, particularly for EPS. I would like to highlight that we have continued our focus on cash generation.

2:05 In Q3, we achieved a strong operational free cash flow of 221 million. As efforts to optimize working capital, capex, and other elements continue to yield solid results. Now, let's discuss reference margins for our main product. For polyester, Asian integrated PET reference margins declined by 18% quarter on quarter, averaging $272 per ton, slightly below our expectation. Meanwhile, Chinese integrated PET reference margins averaged $146 per ton, declining by 35%. For polypropylene, due to the supply and demand dynamics in the region, North American reference margins remain flat, continue to average 17 cents per pound as expected.

3:01 And for EPS, North American reference margins averaged 19 cents per pound, 58% lower quarter on quarter, primarily due to higher raw material prices and a lack in EPS reference prices. Now, Jose Carlos will review the financial performance.

3:22 Thanks, Jorge. Hi, everyone. It's great to be here with you. To begin with, I'd like to discuss the quarter's financial highlights. We achieved overall volume of 1.2 million tons and a comparable EBITDA of $160 million. A robust free cash flow generation resulting mainly from the net working capital improvement and a capex optimization. Now, let's look at the results by segment. For polyester, volume was 955,000 tons, 3% lower quarter on quarter, partially due to Asian imports in the Americas and soft demand in the region. In plastic and chemicals, volume was 222,000 tons, an increase of 4% versus the previous quarter. We saw overall high polypropylene demand in the quarter and particularly lower demand in the EPS from the construction industry in the US.

4:17 Moving on to key fits of dynamics, the US reference paraxylene prices increased by 8%. with the disconnection between the North American and Asian prices growing by 20% to $339 per ton. In the plastic and chemical segment, average reference propylene prices decreased to 36 cents per pound, a 10% decrease quarter on quarter, yet rising in September to 39 cents per pound. Meanwhile, average reference prices for styrene rose to 53 cents per pound, an 11% increase compared to the second quarter, with greater disconnection between North American and Asian prices. In terms of EBITDA breakdown, overall comparable EBITDA was $160 million, 21% lower than in the previous quarter. This was mainly due to a decrease in reference margins and a higher fee strike cost, particularly for PET and EPS.

5:12 Reporte de Vida was $126 million, 50% lower quarter on quarter, which includes the following. An $18 million one-time loss related to the filament facility shutdown costs. A non-cash hyperinflation effect in Argentina, as well as, to a lesser degree, a combined positive carry forward and inventory effect of $1 million. If we take a closer look back segment, polyester comparable levita was $114 million, 11% lower versus second cube. And in plastic and chemicals, comparable levita was $42 million, a 40% decrease quarter on quarter from lower reference margins in EPS and raw material prices rising for polypropylene towards the end of the quarter.

6:01 Regarding free cash flow generation, CapEx totaled $38 million, mainly due to maintenance. Networking capital investment improved by $214 million, which continues to surpass our initial target for the year and resulted in a positive operating free cash flow of $221 million, which quarterly represents $407 million year-to-date. Considering the company's financial position, Alpek's net debt decreased to $1.7 billion, while last 12 months reported EBITDA was $646 million, which led to a net debt to EBITDA ratio of 2.6 times. I'd like to reaffirm that Alpek remains committed to leverage levels below the target of 2.5 times.

6:49 It is worth mentioning that if we were to exclude both the filament site and the Cooper River shutdown from the first quarter, there'd be a leverage ratio of 2.3 times. And finally, in terms of financial performance, let me take a moment to highlight our healthy debt profile, which offers us flexibility for the future. During the quarter, we announced a successful refinancing of the outstanding balance from the 2023 bond that was due in August with bank debt. This includes our first ever ESG sustainability linked loan, a $200 million facility maturing in 2028. Additionally, we currently have over $500 million in available cash and available committed credit lines of over $600 million.

7:35 Thank you for your attention, Jorge. I'll turn back the call to you.

7:39 Thank you, Jose Carlos. As part of our strategy to mitigate the current environment, we're focusing on maintaining our competitiveness and financial strength. With this in mind, the company made two challenging decisions. First, Alpec decided to shut down its filament facility located in Monterrey, Mexico, and will not be substituting production. The site had an installed capacity of 100,000 tons of textile-grade polymer and filament. As you know, Alpec continuously seeks value creation opportunities by streamlining operations to meet the demands of the competitive markets its companies serve, aiming to safeguard our financial strength.

8:25 Therefore, and while this was a difficult decision to make, we have opted to close these operations. I would like to take a moment to express my heartfelt gratitude to each of the employees of this site for their commitment to the company throughout the years. Second, Alpec, along with its joint venture partners of Corpus Christi Polymers, decided to temporarily pause construction of its integrated PTA-PET plant in Corpus Christi, Texas, as high inflationary rates have led construction and labor costs to surpass original expectations. By doing so, in the following months, the CCP board will assess options to optimize the project's cost and timeline.

9:13 and will announce in a timely manner. ALPEC remains committed to maximizing value for CCP and the site will be properly preserved so that construction may resume in the future. Moving on to ESG, in September, we reinforce our commitment to gender equality by pledging to the women's empowerment principles from the UN Global Compact and UN Women. We will continue to diversify our workforce through strategic hiring, retention, and organizational development. We are confident that having greater diversity and a variety of perspectives will positively impact our business.

10:00 Looking ahead at the remainder of the year, ALPEC envisions similar market and industry conditions with slightly lower than expected Asian PET reference margins Both with Chinese PET margins witnessing a recovery from the levels at the end of the third quarter. We also expect some recovery in EPS reference margins. In terms of annual guidance, volume is expected to remain in line. At this time, comparable EBITDA and CAPEX are expected to finalize slightly below revised figures. We aim to preserve and strengthen our solid financial position through various efforts to guarantee free cash flow generation, which we foresee closing the year surpassing our initial target.

10:48 On a final note, I'd like to mention two organizational updates. Alejandro Llovera, previously president of the polypropylene business, will assume the position of president of the polyester business. And Alejandro Alanis, Previously, commercial vice president of the polypropylene business will assume the position of president of our polypropylene business. Both of these changes will be effective as of November 1st. I wish them both success in their new positions and responsibilities. Thank you, everyone. Anton, please proceed with Q&A.

11:28 Thanks, Jorge. At this time, we'll be receiving your questions. To ask your question live, please raise your hand. We'll call on participants in the order they appear. You may also type your questions through the Q&A function. We'll attempt to cover as many questions as time allows. Our first question comes from Tasso Vasconcelos with UBS. Hi, Tasso. Please proceed.

11:56 Hi, hi, everyone. Thanks for taking my questions. I have three here on my end. The first one on CPP. That's the second time you hold investment in the project, right? So it would be great to hear from you. What are the main triggers that would make the company resume investments? Is it back end prices? Is it the cost structures as you discussed previously today? Is it a greater visibility on the future of the industry? That would be my first question. The second one, the company did a great job in optimizing cash flow in the quarter, despite the challenges faced in the industry. And looking forward, what are the main goals here? Where do you see greater opportunities to continue with this optimization, either in working capital, capex, and so on? And third, how should we think about dividends? I mean, the scenario of a tougher industry on one side, but the company being able to maintain a solid cash flow as based on the release here today, we also see a comfortable debt profile.

12:56 So that would be my three questions. Thank you.

13:01 Thank you, Tasso. On the first questions about the Corpus Christi polymers, yes, this is the second time the project has been Put on a pause. The first time was from the previous ownership before going to the bankruptcy. Then it took a while to put the project in a position to be ready to resume construction, and that happened last year. And yes, we will need to get more comfortable with our ability to manage the project execution and contain the cost. and certainly other factors that you mentioned like visibility in the industry are also considerations. But first and foremost is for the company's ability to have an adequate project management.

13:56 Second, on your question about cash flow and further optimization, I think our working capital optimization has been significant this year. I mean, we have reached Very close to our target levels of working capital, we might still have some other opportunities to pursue final optimization on working capital. And as of now, we will maintain very strict discipline on projects. We have a list of projects that are attractive in the pipeline, but the time for them to come in the market, we will review those carefully to to preserve our financial strength.

14:44 The last question, your question was about dividend or could you repeat the last question?

14:57 Yeah, yeah, sure. The last question was on dividends because we are seeing a tougher industry environment, right? But the company has been able to maintain a solid cash flow And based on the release here today, the company has a very comfortable debt profile in the next years, right? So how should we think about dividends amid this tough environment on one side, but the company being able to maintain a solid cash flow on the other side?

15:23 Yeah, I think, you know, we normally our dividend definition comes early in the calendar year. So as we have done over the last several years, it's going to be in the first quarter when we will define the dividend and its level. So we'll communicate accordingly. I think it's important for us to preserve our financial strength because that's one of our priorities to provide Protecto rating and provider shareholders with a dividend as well. So that definition will come in the first quarter. So even though industry conditions are challenging, I mean that definition is going to be made early in the year 2024. Thank you, Tasman.

16:27 Our next questions come from Leonardo Marcondes with BOFA. Please go on.

16:32 Hi, everyone. Thank you for picking my questions. I have two questions here from my side. The first one is on the PEAT integrated margins. Well, we try to follow spreads here every month and we saw that these richer their bottom in the year during September, right? So in this context, could you provide a bit about your view on how do you see these margins going forward for the remainder of the year and also for next year? and my second question is regarding the the working capital right you did you did a very good job uh amid an increase in feedstock price during this quarter so uh could you provide a bit more color on what measures uh have led have led to in such gain working capital thank you yes on integrated pt margins um

17:41 Especially the ones we track and follow and report on China. I mean, it's sort of view and belief that those have reached bottom. And, you know, we would expect some gradual recovery as, you know, going forward. We expect the non-China, the Asian reference margins to retain, I would say, a healthy differential above the China margins. But yes, we will expect some gradual recovery as we go along. But the level I think is still premature to define very precisely. I think in the question about working capital, I think we have optimized for inventories. I mean, last year we were coming, From stronger volumes and we had prepared this year for somewhat better volumes compared to the ones that actually turned out to be.

18:47 So we had an opportunity to reduce our inventories and I think we have been also quite sharp on keeping all our accounts receivables on within the expectations for timely collection and And we have worked well with our supplier base to have competitive terms, but it's been focusing in our inventories that has led the gains throughout this year. And as I mentioned in the previous questions, we may still have some further opportunities to fine tune the level of working category.

19:27 Thank you very much.

19:30 Thank you, Leo. Our next questions come from Andres Cardona with Citi. Hi Andres, please tell your questions.

19:42 Hi, good morning all. Following on PT margins, I just want to understand how sustainable is for the Chinese margins to stay at these low levels that seems below the cash post and If the recovery that you are seeing on the integrated PT margin has to do with oil prices rally or what is driving the recovery. Perhaps the last one staying on margin is we are nearing end of the year when you guys usually negotiate 2000 or next year contracts, right? So it will happen in an environment of very depressed margins. How to think about These contracts, can you remind us how much you usually typically contract in terms of volumes for the year after? And if maybe this low environment may, I don't know, make you more willing to have more exposure to the sport?

20:49 Yes, Andres, I'll answer the questions. I think current PET margins, especially those in China, I think we concur with your view that those are below the cash cost and we think it's a matter of time before they have to revamp. And again, the timing and the level is still to be determined. I think, you know, the oil price is a variable, but, you know, for the most part, the petrochemical chains Then to pass through eventually the oil price and it becomes more an event of supply demand within each respective product. So I think, you know, oil is a secondary variable in the spreads and it has very high oil prices, but, you know, perhaps delay some of the margin recovery, but I think it's a secondary variable in impact. And as far as our contracts and exposures, I mean, we have a mix of already in the company where we have exposure to the global margins, depending on our regions, right?

22:05 I mean, some regions like South America and most of the PET we sell from the Middle East are traditionally more exposed to the Asian market prices. North America is more structured with contracts. Some contracts are multi-year, some contracts have already been settled for next year, and some contracts we are in the middle of negotiating period. So I guess in that case, there is some diversification on our approach to the market.

22:46 Thank you, Andrés. Our next question comes from Jonathan Lopez from ISIS. Please go ahead. Jonathan, can you hear me?

23:07 Hello.

23:08 Yes, perfectly well. Thank you. Thank you. Sorry about that. So yeah, I'm Jonathan from ICIS, the LATAM correspondent. So I keep hearing chemical companies in Latin America saying that the recovery will not really arrive anywhere before 2025. Some of them say beginning of 2025, some others say mid 2025. To the CEO, when do you really think chemicals globally will recover?

23:39 I mean, it's a good question, I guess. You know, in the case of polyester, which is one of our key products, again, I see two, maybe two steps. I think the margins went probably too low, especially on Chinese margins. And we would expect, again, some gradual recovery to happen later this quarter or throughout 2024. And to what extent they recover and when they become, I would say, more average margins or above average, that might take a little longer, perhaps, as you mentioned, until 2025. But we would expect some sequential recovery fairly soon because they just went too low.

24:26 Similar case with EPS. I think reference margins in EPS have gone Very low in Q3 and we would expect some gradual recovery in the following quarters. And for polypropylene, we would expect more flat margins this quarter and maybe recovering towards the latter part of next year.

24:54 Thank you. Thank you, Jonathan. For next questions come from Alejandra Andrade from JP Morgan. Please go ahead.

25:05 Hi, thank you for taking my question. My question was on CapEx because we obviously saw a big drop in terms of the cash CapEx that you spent in the quarter. I know you have guidance, so that would indicate that theoretically you should increase investments next quarter. But I'm just wondering if you're just trying to be more disciplined with CapEx overall and if we should expect actually this low pace to continue into the fourth quarter. Thank you.

25:33 Thank you, Alejandra. Yes, certainly we are very disciplined right now with our CAPEX decisions. I think in the Q4, we will see some increase compared to Q3, because in Q3, we spent a relatively little amount of money in Corpus Christi. And even though we have paused the project, in Q4, we will see some of the expenditures needed You know from Q3 and to demobilize the project so that that will happen in Q4 and we have other capex that will pan out in Q4 and expect some consequentially increase in Q4 relative to Q3 but in 2024 you may expect to see something closer to the pace of Q3 or we have a pipeline of attractive projects that we'll bring into the equation when we feel good about the prospects and the strength of the balance sheet. We don't want to, again, compromise our balance sheet and in due time we'll bring more projects into the equation for sure.

26:54 Thank you so much.

26:56 Thank you, Alejandra. We have questions from the Q&A function. And the question reads, hi, can you confirm your EBITDA and net leverage guidance?

27:11 Yes, our EBITDA guidance that we came up a few months ago was for $770 million on comparable EBITDA. So we are, as we mentioned earlier, we expect to be slightly below that level because of the evolution in industry margins. We will also be somewhat below our last guidance in Carthex. And I guess, is that anything else from the question? That was it. That was it. And Daniel Labroche. Yes, net leverage. I mean, we are, again, it's one of our priorities to remain at 2.5 times or less this quarter. We were at 2.6.

28:04 And, you know, we might see a very slight increase in Q4. But again, we expect to be as soon as possible within our target range of 1.5 to 2.5.

28:23 Thank you. That was our last question in the queue. You will find both a recording of this webcast as well as a transcript at alpec.com. Feel free to contact us directly for any additional information. Have a great day.