Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q3 2025 Earnings Call

0:00 Good morning, everyone. Welcome to Altec's third quarter 2025 earnings webcast. I am Bárbara Amaya, Altec IRO, and I am pleased to be here today with Jorge Young, our CEO, and José Carlos Fonts, our CFO, who will be presenting today's material. Today's agenda will cover the following topics. First, Jorge will provide an overview of the quarter. Then, José Carlos will cover the financial results in greater details. as well as the process regarding the merger of Controladora Altec with Altec following the successful completion of regulatory approvals. Afterwards, Jorge will discuss the outlook for the remainder of 2025 and an update on tariffs. Finally, we will conclude with a Q&A session.

0:48 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 entirely on these forward-looking statements. Alpec undertakes no obligation to publicly update or revise any forward-looking statements, whether it is as a result of new information, future events, or otherwise. We express our financial results in U.S. dollars unless otherwise specified. For your convenience, this webcast is being recorded and will be available on our website. Jorge, I'll turn the call over to you.

1:36 Thank you, Bárbara. Good morning, everyone. Thank you all for joining us today. Alpek's financial and operating results show a 10% sequential improvement versus the previous quarter, while still reflecting the challenging environment in the chemical industry. The polyester segment reported a better product mix and steady volume levels, following the resumption of our PCA operations at the facilities that had undergone shutdowns in the previous quarter. Meanwhile, the plastics and chemical segments continued to deliver consistent results, supported by stable regional demand seen throughout these months.

2:22 Operating free cash flow was 68 million, These financial results reflect ALPEC's ability to partially offset the impact from global oversupply, which continues pressuring reference margins as well as lower ocean freight rates. Now I will turn the call over to José Carlos to provide our financial performance in greater detail. Thank you Jorge. Good morning everyone. Thanks for joining us today. Allow me to dive deeper into our quarter results. Total volume was 1.12 million tons, increasing by 1% from the previous quarter and increasing 8% on a yearly basis, as it remained pressured from persistent market oversupply, particularly in the polyester segment.

3:11 Reported EBITDA totaled $116 million, including a $21 million negative adjustment.

3:17 This figure reflects extraordinary costs from the permanent closures of the Cedar Creek and the River Valley site as part of our footprint optimization strategy. Comparable EBITDA resulted in $137 million, a 10% increase from the previous quarter, driven primarily by the polyester business. Moving forward to the As operations resumed from prior maintenance shutdowns, yet still pressured by market oversupply, as mentioned previously. Asian integrated Fed reference margins averaged 276 per ton, declining by 10% from the previous quarter, and Chinese Fed margins decreased by 14% to 134 per ton. Chinese reference margins stabilized during the quarter, a shift of the volatility seen in the first half of the year.

4:18 However, continued to be at very low levels. Use reference for exiling prices increased 1% from the second quarter to $1,139 per ton, yet remained 8% lower compared to the same period last year. This narrowed the spread between North American and Asian prices to $253 per ton, an 8% decrease from the previous quarter. Polyester Compagno Levidad reached $88 million, a 24% increase quarter-on-quarter, supported by a better product mix and operational cost performance. On a year-to-year basis, global oversupply, trade-related headwinds, and lower freight costs continue to have a negative impact.

5:05 Meanwhile, the plastics and chemical segments continue to deliver a stable performance. Volume totaled 195,000 tons. Off 3% from the last quarter and down 12% from the last year, as normalized demand levels persisted. Moving on to industry references, polypropylene margins remained flat in line with our guidance expectations at 14 cents per pound, while average propylene prices declined to 36 per pound, down 5% from the previous quarter. On the other hand, North American reference margins for EPS averaged 38 cents per pound, Up 22% sequentially, while average styrene prices decreased to 44 cents per pound, and 11% drop quarter over quarter.

5:53 Plastic and chemicals comparable levidad was 47 million, and 8% decrease quarter over quarter, and 25% lower year on year, as improving preference margins were offset by a slightly less favorable product mix. Looking at free cash flow and capital allocation, Networking capital improved by 38 million compared to the previous quarter, driven by better inventory management and targeted optimization efforts. This positive trend was further supported by a more stable raw material pricing environment, particularly for property. We remain on track to achieve a full year recovery in the range of 60 to 70 million. CapEx for the quarter was 32 million. including 28.5 million in maintenance and 3 million in strategic investments consistent without the ongoing focus on disciplined capital allocation as a result operating free cash flow totaled 68 million a 41 percent increase from the previous quarter totaling 123 million year to date i would like to highlight that ALPA continues to generate significant positive cash flow and maintains a strong free cash flow yield despite the challenging industry backdrop.

7:10 On our balance sheet as financial position, net debt was $1.8 billion, up 2% year-over-year, yet declining by 3% from the previous quarter. Last 12 months, Reporte De Vida totaled $458 million. resulting in a net debt to EBITDA ratio of 4.0 times, an increase from the previous quarter as anticipated. Notably, if we adjust for non-recurring items related to cost structure improvement and footprint optimization initiatives seen through the year, the performer leverage would have resulted in 3.7 times. As we approach year-end and as market conditions are taking longer than originally anticipated to recover, APEC expects leverage to remain at higher levels.

7:55 and we will continue to be focused on taking the necessary measures to reduce its leverage through the following actions. One, footprint optimization. We've taken decisive action by closing four facilities to date and are continuing to assess marginal sites as part of our post-discipline efforts. Two, divestiture of non-core assets. With a focus to maximize value for our shareholders, we are progressing with the potential divestiture of several non-productive assets. Three, Continuous Debt Profile Improvement Thus far, we have successfully refinanced 690 million, improving our average debt maturity to 4.6 years. And we successfully refinanced all of our 2025, 2026, 2027 debt maturities, and we are currently exploring opportunities for the remaining debt in 2028 and 2029.

8:47 Free Cash Flow Generation through Networking Capital and CapEx Optimization and finally, foregoing a dividend payment in 2025. Through these actions and amid challenging industrial landscape, ALPEC reiterates its commitment to continue its leveraging efforts in line with our priority of maintaining a strong investment rate profile. And finally, I am very excited to share that a key development for ALPEC The National Banking and Securities Commission, or CMDB, has recently given the company the approval to merge Controlador Alpec with Alpec. Earlier this morning, we called for the Extraordinary Shareholders Meeting to be held on November 25th, to request approval for the merger between both entities.

9:34 We also would like to remind our shareholders that in order to legally install the shareholders meetings, we require the attendance of shareholders with represent at least 75% of the capital stock. Therefore, we invite you to make sure that your shares are represented and that the respective vote is exercised. Your participation is very important to ensure that the merger is approved more strongly and becomes effective once the legal process has been completed. This is an important step in order for Controlador Alpec and Alpec to be listed as a single entity. Additionally, with a 100% free flow, Alpec could become a candidate to join the Mexican Index, or IPC, among other indexes which would generate additional shareholder interest.

10:22 Together, with our continuous execution to prioritize competitiveness, Alpec is confident in its ability to deliver long-term value for its shareholders. With that, I'll turn the call back to Jorge. Thank you, José Carlos. Moving forward to the outlook for the remainder of the year, Overcapacity will continue to be the main challenge in the industry. As a result, reference margins are estimated to remain pressured alongside low ocean freight costs, which are also expected to continue impacting our performance.

10:57 In light of these dynamics, the company is revising its full-year comparable EDIDA guidance to approximately $500 million. We expect fourth quarter results to reflect lower demand from a typical seasonal effect alongside plant maintenance shutdowns in several of our sites. Looking ahead, we have a very significant development regarding trade regulations in the United States. Through an executive order, effective September 8th, PEP racing has been removed from the list of exceptions on reciprocal times. Meaning that imports for both virgin and recycled PET into the USA will now carry an additional duty at the levels negotiated by the US government with numerous countries, including the key Asian countries exporting PET into the United States.

11:54 This change is expected to create a more balanced competitive landscape for domestic producers. While we welcome this news, It is still early to quantify the impact of the new tariffs. Notwithstanding, we are optimistic that we would see favorable impact to ALPEC starting in 2026 and adding in 2027, as contracts are renegotiated and by gaining volume through displacing imports. We will provide an updated view when we issue our 2026 guidance, concurrent with our full-year 2025 resource release this coming February. Bárbara, I'll turn the call back to you. Thanks, Jorge. Before we start the Q&A session, I would like to restate what Jose Carlos mentioned regarding our upcoming Extraordinary Charitable Court Workholders Meeting for the approval of the merger between Perla Mora Altec and ALC.

12:52 Their participation is extremely important to ensure the merger is effective. As in order to legally install the shareholders' meetings, we require the attendance of shareholders which represent at least 75% of the capital stock. So we strongly encourage all shareholders to participate and vote, whether by registering and attending the meeting or through proxy voting. If you have any questions, please reach out to me or anyone in the IR team. We would be happy to assist you. We will now proceed with Q&A. To ask your question live, please raise your hand. We will call on participants in the order they appear.

13:36 You may also type your question through the Q&A function. We will attempt to cover as many questions as time allows. Our first question comes from Thiago Cascado from Morgan Stanley. Thiago, please proceed with your question. Hello. Thank you, Barbara. Thank you, Jorge and José Carlos. I know this tends to have kind of a lagging effect on prices, and you mentioned the impact only in 2026 and 2027, but with the US government removing P&T from the tariff exemption list, have you noticed any impact yet in new contracts or spot sales? So, basically, is it possible to see the effect flowing into 4Q results already? and the second one is related to volumes. I know we have the seasonality effect on volumes in the fourth quarter and also the maintenance you mentioned, but what trends have you observed in demand and volume so far in October and what are your expectations for 2026?

14:38 Thank you. Thank you for your questions. Those are very good questions. Yes, indeed, what we said is that we expect to see the impact of the reciprocal tariffs more into 2026. There are some relatively small positive reactions in the fourth quarter, but for the most part, we will see the effects in 2026 as contracts renew and also consider that imports have been heavy throughout the first nine months of the year. So the market needs some time to absorb and still digest that pipeline.

15:26 So yes, some small positive signals in fourth quarter. The most relevant will happen in 2026. In particular, the fourth quarter, we have the low seasonality, which is typical of the

15:42 fourth quarter. I would say the last two or three years has been more acute than what we had seen in previous decades, I would say. But also compounding effects from the heavier levels of imports in the first nine months of the year. That mostly explains the more we can do in volumes in the fourth quarter. Thank you. Very clear.

16:16 Our next question comes from Ben Isaacson from Scotiabank. and please proceed with your question. Hi, can you hear me okay? Yes, very well. Oh, great, great, thank you. I just have one question. When you think about your key chemicals, you know, PET, PP, EPS, etc., can you rank them in terms of two different things? One is... Through Cycle Return on Invested Capital, and then number two is Free Cash Flow Conversion. Can you just explain which of the chemicals are kind of more efficient from a use of capital point of view?

17:02 Thanks. Generally speaking, our plastics and chemicals, polypropylene and EPS, More efficient in return of capital throughout the cycle. I think we have some more elements for differentiation and a little bit less exposure to other markets. Most of our footprint is in North American doctor businesses.

17:35 So, just to be clear, you would have a better return on capital, a better free cash flow conversion in the P&C segment. Does that mean that it deters you from investing capital in the polyester segment in the future? Not necessarily. I think the polyester segment has very interesting opportunities to... to still improve its technologies and its cost, and I think we are nurturing

18:08 and working into those projects as we speak, and when they're ready, we will revisit our cash flows, and they will likely be still financed within the cash flows from the Polyester Division, but that's something we will see in due time. Thank you very much. Maybe just an addition to that, the way that we have also been able to compensate in the polyester segment is through acquisition. We've made very attractive acquisitions in the past at below replacement cost of capital,

18:40 and that compensates what Jorge just indicated. That makes sense. Thank you. Our next question comes from Leonardo Marcondes from Bank of America. Leo, please proceed with your question. Hi guys, thank you for picking my questions here. I have two from my end. Regarding the readjustment guidance, I would like to understand a bit better. I mean, as you have already said, volumes in the first quarter are usually lower than in the third quarter. I would like to understand if all this revision of the guidance for this year is mainly attributed to these lower volumes, right? Because at the end of the day, Thank you very much.

20:05 And the second question is regarding the PET market itself, right? I mean, if you guys could provide any update

20:16 regarding the market dynamics and mainly if you have seen any new announcement in shutdown capacity and what could we expect from this regard for the next year? Thank you very much.

20:37 Thank you for your questions. I think in fourth quarter, while there is a small uptick in margin on reference margins, they still remain at a very low level. The other important variable is that ocean freights have come down from the second and third quarter levels. And also in third quarter, Demand was, while it was steady and robust in some of our segments, it was somewhat below what we had expected earlier in the year. As I mentioned,

21:17 In a very important market for all of the United States, imports of Asian products had been very heavy in the first nine months of the year. There was a significant wave of imports before April, you know, when the reciprocal tariffs, you know, dynamics were evolving. So that still put pressure on third quarter. And that's basically the reason of our reduced expectations. As far as PET market dynamics, look, I think we can see that several plants in Asia and in Europe are under tremendous pressure.

22:03 And there are rumors and discussions, but nothing that we can say specifically at this time. Just maybe one follow-up here, regarding the narrative of the anti-evolution in China, do you expect an impact from that on the petrochemicals, or so far what has been announced has been softer than initially expected?

22:34 You know, I think that's just an emerging discussion, I think, still. There has been, again, in many products, even beyond petrochemicals, discussion how to deal with the excess of capacity in China. And in the chemical field, this anti-evolution is being discussed in the context that plants that are either 15 or 20 years old or older must be scrapped. Honestly, I don't know exactly to what extent that is still, if indeed is happening.

23:14 If at all there will be a modest effect, I believe. I think we are bracing for a top cycle and for actions on having the right footprint, having the high focus on cost efficiencies in our balance sheet. For us that's the way to go. We still have some We will share some of those early next year. But this is navigating in a tough environment, a tough cycle. That is our assumption. If indeed some of these closures happen and happen

24:03 For a higher magnitude of PACE, that's potentially an upside for us. Got it. Thank you very much. Our next question comes from Pablo Ricardo from Itaú. Pablo, please proceed with your question.

24:25 We have two questions. The first one is a follow-up on Leonardo's question on the guidance. I just want to ask if your new $500 million assumes some benefits coming from the new reciprocal tariffs, or that's an upside risk in case these new tariffs stop on the ET margins? And the other one is on the negotiation of contracts. If I'm not mistaken, you usually negotiate them around October, November. So, I don't know if you can provide how are those negotiations evolving.

25:02 Yes, Carlos, thank you for your question. Yes, I think in the guidance, we're factoring everything we know, but as we have said earlier, The market is going to take some time to continue to digest the relatively large level of imports that came through the first nine months and is in the slowest quarter of the year. That's why the effects are relatively small

25:34 and those are already factors. The negotiations, as you just said, they are just beginning. This is the period where negotiations normally happen in the industry. A relevant portion of the volume is normally up for negotiation year after year. And that's just the beginning. That's why we prefer to see how that process evolves.

26:03 And then we go from there and we'll let you know more quantitatively in the beginning of the year. But just some facts. Imports from Asia in an annualized space through September is close to 800,000 tons into the United States, like 760. And on the five or six main Asian countries that bring product into the United States, the change in the tariffs was between 15 and 20%. So

26:34 I think that will, again, provide us More opportunities to capture volume, potentially increase margin, but we want to navigate those waters. I think it's just early and again the demand is quite soft to close the year, so I think we'd like to take our time. Perfect. Thanks a lot, Jorge. You're welcome, Pablo. Our next question comes from Joao Valdela from UBS. So Raul, please proceed with your question. Hi Jorge, José, thanks for taking my questions.

27:21 I have two very quick questions from my side. Could you provide an update on the current investment plans in terms of how material potential movements could be and their timing?

27:31 Moreover, considering the increase of leverage to four times the debt EBITDA, do you maintain the 2.5 times target? And if so, when do you expect Alpac to reach this goal?

27:40 Could you consider a resumption of dividend payments out of next year's radar? Thanks.

27:48 Thank you, Joao. Very good questions. Well, first of all, the divestiture of non-strategic assets, as we have already indicated in previous calls, we have around three sites that we shut down in the U.S. We're exploring the opportunity to sell those assets. There are ongoing processes in two of them. And we're progressing as fast as we can, but it takes time to be able to close the transaction. So no update on the potential timeframe for closure. However, we're doing whatever we can to proceed as fast as we can.

28:25 That could be a smaller contribution, probably around $30 to $50 million altogether, those three assets. On the other hand, the Mexican, the Monterey site, we continue to evaluate opportunities for that asset. It seems less likely that we'll be able to sell it as it is. So we might need to think of further options on splitting the asset or developing a little bit further.

28:51 We are working on those options and evaluating the potential requirements of capital and we will continue to give you updates on a quarterly basis. So no further update but it's a valuable asset that could contribute. We're not in the mood of fire selling that asset at this moment. In terms of leverage, yes, our target continues to be 2.5 times. Unfortunately, our leverage increased in this quarter. So what we have done, as indicated in my initial comments, everything we can and it's in our hands to improve and to reduce the impact of different factors that have impacted us. We expect to continue the leveraging throughout 2026. We expect that we will be closer to the 2.5 times by year end.

29:37 Of course, we will continue to find avenues to reduce the leverage. And one item that we will evaluate potentially in the second half of the year, it's a dividend. Of course, it will depend on where we are and how do we see the environment and the performance of APEC. At this moment, it seems difficult to give you a precise answer if there's a dividend in 26 or not. Very clear. Thanks. Thank you. Our next question comes from Rodrigo Almeida from Santander. Rodrigo, please proceed with your question. Hi Jorge, Jose Carlos. Thank you for taking the question. I just want, from my side, if you could give us an updated view on what we expect in terms of direction in working capital for the fourth quarter.

30:30 and perhaps for early 26 as well if you can, just so we have a sense of your expectation in terms of cash generation for the next few quarters. Thank you. Yeah, thank you, Rodrigo. Yes, as we indicated, this third quarter was positive and we were able to capture opportunities to reduce working capital, so the majority of our expectation has already been delivered. And by year end, total benefit is expected to be in the order of $7 to $80 million.

31:07 So that would include the benefit of what we're already being achieved. Thank you. Our next question comes from Pierre Andreser from SFDC. Pierre, please proceed with your question.

31:37 Hello, this is Laura from SMBC. Thank you, Jorge and Jose, for your comments. In terms of guidance, you've mentioned 500 mil for 2025. And I know this is a little bit early, but do you have any idea of how EBITDA in 2026 will be impacted? How would the margins look like and the capex for next year as well? Not yet, that's it. We'll share all those details in our call in February. However, this event of the reciprocal catalyze is important, is relevant. We would expect some sequential improvement, but we'd like to go over the process of how the markets actually evolve on that topic.

32:35 Again, it's a positive event, but we will quantify for you all in favor. And we will see the benefit of some cost reductions that we have done in 25 yielding results in 26, so that's something also positive for results in 26. Thank you. And where do you see the margins as of the end of the year? You know, reference margins, we continue to see them steady on the low side. Reference margins, we mean the Asian margins. The ocean freights, which is important for us because ocean freights are correlated clearly to the import parity Andres Alonso-Cabrera. Thank you.

33:53 That is applying to Asian origins in the United States, right? But even the reciprocal tariffs are going through some challenge in the courts. I think it's our expectation from all the canvassing of opinions we've gone through of the industry and many industries that they will remain. But even that event is still to be seen. That is also a reason for us to, once we are in the beginning of the year, we will have the full picture. Got it. Thank you so much. Thank you. Thank you. That was the last question with you. So thanks everyone for joining our webcast. We look forward to seeing you at our shareholders meeting.

34:39 Have a great day.