Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q2 2021 Earnings Call

0:00 Good morning, and welcome to Alpec's second quarter 2021 earnings webcast. I'm Alejandro Lizondo, Alpec's investor relations officer, and today I have the pleasure of being joined by our CFO, Pepe Valdez, and our CFO, Jose Carlos Ponce. This presentation is divided into two parts. First, Mr. Valdez and Mr. Ponce will provide commentary on Alpec's second quarter 2021 performance and an update on relevant events. 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 risks and uncertainty. 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.

0:52 I'd like to remind everyone that today's webcast is being recorded and will be available on our newly redesigned webcast located at alpec.com. I will now turn the call over to Mr. Pepe Valdez.

1:05 Thank you, Alejandro. Good morning, everyone, and thank you for joining us. I hope you're all well. You're all doing well. Today, I am excited to share with you that Alpec has delivered yet another strong quarter amid a booming global economic environment During the second quarter, in addition to achieving record volume highs, we achieved our highest month ever in terms of comparable EBITDA. Let's start by reviewing the main topics that will be discussed in today's webcast. First, Alpec has greatly surpassed financial performance expectations for the second quarter. Jose Carlos will review this in greater detail. Second, ALPEC made large strides in its long-term growth strategy by acquiring Carbon Light's ARPED facility.

1:57 Third, ALPEC has continued to make progress in its ESG efforts. And fourth, we will provide additional insight into our revised 2021 guidance as per the Earnings Report released yesterday. Providing some context for this quarter result, the increase in the amount of people getting vaccinated against COVID-19 has improved market confidence and therefore continued strengthening the global economy. is the stronger economic activity has generated rising demand for petrochemical products, including PET. As such, during the second quarter, Asian integrated polyester reference margins further improved to an average of $356 per ton. It was much higher than ALPEX revised guidance figure of $285, which was based on the supply demand balance expectations prevalent at the end of the first quarter.

2:59 Similarly, the market has experienced a stronger demand for polypropylene.

4:31 Apologies, we have technical difficulties. We will now continue the call.

4:36 Similarly, the market has experienced a stronger demand for polypropylene. This has kept this product inventory levels low in North America, thereby extending the positive effects of the Texas polar vortex on margins. In the second quarter, margins continue to strengthen to an average of 47 cents per pound. We believe this tendency has the potential to carry over into the third quarter. At this point, I would like to turn the call over to Jose Carlos, who will go into more details regarding the positive impact of this event on our financial results.

5:13 Thanks, Pepe, and thank you all for being here with us today. I want to begin by highlighting the company's outstanding performance throughout the quarter. Alpec achieved an overall volume of 1.2 million tons, a record high for any second quarter period in our history. Comparable EBITDA of $225 million as a result of record second quarter volume and higher than expected PET and polypropylene margins as discussed by Pepe. A leveraged reduction to 1.3 times as last 12 months EBITDA significantly increased and strong results offset capex and dividends in the quarter. Turning our attention to volume, Alpec reached 1.2 million tons this period, setting a record for any second quarter in our history and achieving an 8% increase year-on-year.

6:06 In the polyester segment, volume was 1% higher versus the figure for last year due to a strengthened demand. Volume decreased by 5% versus the previous quarter as a severe drought in Altamira temporarily affected our PTA production rates. In plastics and chemicals, volume increased by 45% year on year, mainly due to demand strength across the segment, as well as the incremental volume from the styrenex business we acquired in the United States last year. This figure exceeds our highest ever plastic and chemicals volume, set in the fourth quarter in last year. It is important to remember that 2020 figures were adversely affected by shutdowns in the construction and automotive industries at the height of the COVID-19 pandemic. Moreover, if we exclude our recently acquired EPA sites, volume would have been still 25% higher versus last year.

7:02 Moving on to raw material price dynamics, as the global economy continues to strengthen, demand for refined products has kept rising, leading to an increase in average spot brand crude oil to $69 per barrel, 13% higher than in the previous quarter. Correspondingly, US reference paraxylene prices also increased by 12% versus last quarter. In plastics and chemicals, propylene prices averaged 67 cents per pound, an 8% decrease when compared to the previous quarter, but rising to 74 cents per pound in June. This rise in prices towards the quarter end generated a positive inventory adjustment and a carry forward effect across both of our business segments.

7:49 Switching over to our EBITDA breakdown for the second quarter, we can see that comparable EBITDA was $225 million, 11% higher quarter on quarter, as Alpec experienced record second quarter volume and PET, polypropylene, and EPS margins were significantly higher than expected. Reported EBITDA was $273 million, 268% higher year on year, as this result also includes a non-cash inventory gain of $18 million and a positive carry forward effect of $29 million. In terms of results by key segment, we can see that polyester comparable EBITDA was $102 million, increasing by 14% quarter on quarter. Our results largely benefited from our rising average Asian integrated pet margins to $356 per ton.

8:44 At the same time, plastic and chemical comparable levita was $120 million, an increase of 23 quarter on quarter since polypropylene margins increased by 46% as the effects from the Texas polar vortex have persisted and thus inventories remain low. With regards to free cash flow generation, networking capital investment decreased by $6 million as feedstock price increases during the quarter were more than offset by an improvement in supplier credit terms. CapEx totaled $132 million and was mainly allocated towards the acquisition of Carbon Light's ARPED facility. Free cash flow totaled $90 million as strong EBITDA more than offset this quarter's CapEx.

9:33 APEC also paid out a dividend of $128 million, which had been approved during the annual shareholders meeting held in March. Finally, regarding our financial position, APEC's net debt at quarter end increased marginally to $1.25 billion. Last 12 months EBITDA increased sharply this quarter, resulting in an improved leverage ratio to 1.3 times net debt to EBITDA. more than in line with investment grade requirements. If considering net debt to compare our levidad, we can also see that Alpex has further improved this ratio to 1.7 times. Thank you, everyone. And I will now turn the call back to Petri.

10:16 Thank you, Jose Carlos. Switching over to our most recent events, Alpex made important strides this quarter on the fostering a circular economy pillar of its long-term growth strategy. On June 7th, the company announced its acquisition of Carbon Lights, a state-of-the-art pet recycling and pelletization facility in Reading, Pennsylvania, in the United States, for $96 million on a debt-free basis. This site is one of the largest integrated ARPED facilities in the Americas, meaning it is equipped with a solid-state polymerizer designed to produce food-grade pellet the ARPED format needed to enable fully circular bottle-to-bottle recycling.

11:05 With this acquisition, ARPED has grown its total ARPED output capacity to 282,000 tons, reaffirming its position as the largest PET recycler in the Americas and achieving the company's target of supplying its customers with 25% ARPED content before 2025. The company expects to conclude commissioning and begin production in the third quarter of this year. Moving on, regarding ESG, a topic that has continued to climb higher on our agenda in recent years. ALPEC during 2020 was able to increase ARPEC infrastructure as mentioned earlier.

11:53 Redefine its dynamic materiality matrix, identifying the most pressing ESG topics for our stakeholders. Reduce scope 1 and 2 carbon emissions by 8.7%. Reduce total water consumption by 7.7%. Today, I'm proud to report that as a result of these actions, we have been included in the Bolsa Mexicana de Valores and S&P DJI's Total Mexico ESG Index. Participants in this index have shown a commitment to ESG as part of their ongoing decision making, which has historically translated also into higher returns for investors.

12:41 Moreover, this year we began Project Evergreen, an effort geared towards analytically defining the KPIs, targets, and action plans we need to continue to improve on all of our material issues. We plan to unveil these targets and initiatives later this year. Finally, regarding our outlook for the remainder of 2021, And after a careful review of the factors that led Alpek to revise its guidance last quarter, the company once again has decided to provide updated guidance figures and key assumptions. Stronger than expected, pet demand and margins, as well as the one-time benefits generated in the plastic and chemical segments by the polar vortex, continued into the second quarter. In the polyester segment, Alpek expects the continuation of strong demand with Asian integrated margin now expected to average $300 per ton for the year and normalizing at $285 per ton in the fourth quarter.

13:52 In the plastic and chemical segment, the strength in polypropylene margins is also expected to continue late into August. increasing annual reference margins to 36 cents per pound. Moreover, margins at the end of the year are also expected to be higher as the entry of production capacity last year was well absorbed by an increase in demand. Our new guidance figures are based on an average Brentwood oil reference price of $70 per barrel for 2021, off from $63 under our previous guidance, as demand for refined products has further increased without a corresponding increase in supply.

14:39 Based on these assumptions, guidance for overall comparable EVDA in 2021 is now set at $765 million, and $880 million for reported ABDA, as well as we still expect to end the year with a net positive inventory adjustment and carry forward effect. Guidance for CAPEX is also being raised to $250 million to reflect the recent acquisition of CarbonLine's ARPED facility, which was only partially included in our original guidance. Overall volume remains unchanged as performance across both segments continues in line with our original guidance. As always, I would like to thank our team, customers, and suppliers for another great quarter.

15:33 I would also like to thank all of you for your attention today. I will now turn the call back to Alejandro to open the webcast for your questions.

15:45 Thank you Pepe. At this time, we will now move on to the Q&A portion of our webcast. To ask your question live, we ask that you raise your hand virtually through the Zoom application. We will call on participants in the order that hands are raised. Alternatively, you may also type your question through the Q&A function of this application. We will attempt to cover as many questions as time elapses. Our first question comes from Luis Carvalho with UBS. Luis, your audio has been enabled. Please unmute yourself and proceed with your question. Hi, can you hear me? Yes, we can hear you well, Luis. Thank you.

16:24 Hi, Pepe. Hi, Jose Carlos. Thank you for taking the question. If I may, three quick questions here. The first one, if you can provide an update on Corpus Christi, so that would be great. The second one is, I mean, you reviewed the EBITDA guidance upwards and And as a consequence, that opens room for potential dividends. So just would like to understand a bit more on the capital location front. And third, if you have any update on alpha restructuring and how this would, you know, impact potentially, I would say outback in terms of the, you know, accident to the company. Thank you.

17:09 Okay. Well, Luis, good morning. First, on CCP, there's basically no news from what we have discussed or during the last meeting. The idea is to finalize all the and the contracts or building contracts with different EPCA companies to be ready to start construction early next year. So basically no change in what we have been mentioning before. Relative to CAPEX, well...

17:55 CAPS allocation, yeah. Dividends, right? Yeah. Capital allocation and dividends. Yeah. Regarding dividends, well, the ALPEC, well, I mean, the I'll pick an alpha board. I mean, it's more alpha on this situation, but they will decide, I think, during the next couple of months, the amount of dividends that should be paid. And of course, a consideration will be made at the higher than expected cash flow results for this year. but we don't have yet a number that we could share with you.

18:42 And in terms of the Alpek spinoff, I think as we mentioned before, the spinoff is not necessarily something that we see in the very short term. It's a process that will take time. And again, on that front, we don't have any new information to share with you.

19:10 OK. Thank you. And congrats on the results.

19:13 Thank you. Thank you.

19:18 Our next question. comes from the line of Ben Isakson with Scotiabank. Ben, your audio has been enabled. And proceed with your question.

19:29 Great, thank you. Can you hear me okay?

19:31 We got you, Ben.

19:33 Great. So I have two questions. I'll ask them one by one, if I may. First one, with the petrochemical cycle looking like it's near peak, Investors are starting to focus more on those companies that can still deliver controllable EBITDA growth over the coming years. Some of the feedback that we've received recently on Alpac is that your leverage is very low and possibly falling further and perhaps limiting controllable EBITDA growth over the midterm, which could lead to investors switching out of Alpac into more growthy names. Can you discuss the balance between funding a more aggressive growth strategy from the balance sheet versus the need to maintain an investment grade credit rating? Thank you.

20:25 Well, that is an extremely good question, which has not easy answer, I think. For us, as we have mentioned, of course, maintaining investment grade has always been important. But when we have had opportunities, M&A in particular, that present themselves, and let me remind you of the acquisition of Brazilian assets back in 2018, We've taken the growth opportunities with confidence that, if anything, our leverage ratios will increase only in the short term.

21:10 So while I do agree that at some point in time there's a certain conflict that you have to balance both alternatives, my opinion is if we continue to find attractive growth opportunities, we will pursue those. Of course, being very careful also with the leverage. So it could be a factor, but... I do believe that, and particularly now that we have such a strong balance sheet, I think we can accommodate both.

21:49 Thank you for that. Let me ask my second question. You've given updated guidance on 2021 EBITDA. Thank you for that. Now that we're more than halfway through 2021, the sell side, the buy side are starting to focus on 2022. Now, I know it's a bit early to provide guidance right now, but can you just talk about how you see prices or margins, PET or PP, developing in 2022? And really what we're trying to figure out is what kind of EBITDA sensitivity should we be thinking about? I just see that EBITDA estimates for next year are all over the place, and it may do the company a disservice without some more guidance.

22:36 Well, I have to say that it is difficult at this point to make a forecast for 2022, but we believe that margins for most of the products, except for polypropylene, where margins have really been extremely high, I think margins in most of our other products will be very similar to this year or could even have an improvement. And let me explain a little bit. On top of the cycle and everything, there is a factor that has been helping our margins that was not considered when we set the prices of the products at the end of last year for our contracts into this year. I'm talking particularly pet.

23:34 and prices for North America, which is by far our largest market. And that has to do with the freight rates, ocean freight rates. Ocean freight rates, as you are all aware, have increased significantly over the last year. And again, in order for us to assess, how the margins will look into this year. We do have to, you know, have a better feeling of trade rates, you know, again for 2022. But our expectation today is that this will allow, at least again in PET, which is our largest product, North America, this will allow for an important increase in margins next year.

24:24 The improvement in margins that we have experienced in Asia this year have not been translated into higher margins for North America. They have been translated for higher margins, particularly in our South American region. But in the largest volume, which is North America, they were not, let's say, relevant this year. But hopefully, for next year, as I mentioned, even if margins in Asia go down a little bit, we still have the impact of freight, which could be quite considerable. So again, we are optimistic in terms of margins for next year for PET.

25:21 We are neutral on EPS. In volume, in both cases, we are optimistic that we will be able to operate the plants at capacity. In both cases, it's tiring and polyester. In fact, we do hope that next year we will be able to improve our production versus the existing year. We have faced a lot of issues this year that should not be repeated into next year. We have, I think Jose Carlos mentioned briefly, the drought we experienced in Altamira, which took away a lot of volume.

26:07 We have had a couple of shutdowns. Some of them unplanned. And so again, for next year, margins of PET, we see an improvement overall. Overall, not necessarily talking Asia. But overall, our margins in PET, we see them improving. Volume improving. In EPS, margins neutral or steady, stable. Volume continues to be strong. And the big question for us at this point in time is polypropylene. We see, again, the volume quite stable. But in terms of margins, in case of polypropylene, yeah, we do expect them to go down.

26:55 But as we did mention also today, the level of supply demand that we are expecting for North America 2022 relative to what we were seeing last year is much better. So I do believe that the margins will come down, but perhaps we'll be able to keep a reasonable margin.

27:20 Can I just ask one more very quick question? You've talked about freight rates being a much more important story this year, and I see that. When I look at your asset portfolio, I could be wrong, but I believe outside of the Americas, you have the Wilton site. I'm not sure how many other plants you have outside. But does that mean that maybe you're going to look more towards investing overseas now to try and arbitrage out those high freight rates? Or are you still focused from an M&A point of view on the Americas?

27:56 Look, in reality, first of all, the freight rates, I think this might be an issue of a couple of years, one, two years, three years, perhaps. I don't see this as a long-term issue. So again, it's not like a strong enough reason to change our strategy. I would say that in general, even today, most of the markets we supply are supplied locally or domestically. So in that sense, the increase in freight rates is mostly helpful.

28:41 for our performance. Because in general, we price our products at the import parity prices of these products coming from other regions. So if the phrase were to continue high, and I'm not saying I believe that, at least not for a longer period of time, but if they were to continue being higher, that would be helpful and allow us to improve our margins. but it does not have an impact in our decision making in terms of M&A.

29:18 Okay, thank you.

29:20 Thank you, Ben. Our next question comes from the line of Nikolai Libman with Morgan Stanley. Nick, your line has been unmuted. Please ask your question.

29:31 Hi, good morning, gentlemen, everyone. Thanks for the call and for taking my questions. Congrats on these incredible numbers. Three questions. One, molecular recycling versus mechanical recycling. You clearly hit the ground on the mechanical side and you're doing great progress. What is the current thinking with regards to molecular recycling initiatives within Your organization of what you're seeing in the marketplace. So any kind of reflections on that would be highly appreciated. Number one, number two, back to Corpus Christian, the new capacity, you're growing volumes in pet by about 8%. Um, How would you feel if some of your partners there would not be prepared to push forward?

30:17 Would you be interested in taking perhaps a larger stake in the corpus and thus increase your exposure to a virgin product? And then finally, can you give us an update on the Caprolactum business and how I remember you were facing some supply issues there. How is that doing? Thank you very much. And again, congratulations.

30:41 Thank you, Nick. Chemical versus mechanical recycling. Well, I agree with you. Mechanical recycling has, for the most part, been the largest route existing today. A lot of different technologies, different companies working very hard, investing a lot of money on the chemical recycling front. We are very close to some of them. We're very, very close to several of them. But the truth is that the chemical recycling has proven more difficult than what everybody expected. And I do believe that eventually there will be a process that will succeed, but it's going to take time. So that's why, although we are active on the chemical part of the equation, the risk chemical recycling, we still believe that in order for us to satisfy the customer needs in 2025, we have to do that mostly with mechanical recycling.

31:45 In the longer timeframe, as I mentioned, I do believe, of course, chemical recycling will play an important role. Chemical recycling should be less sensitive to quality of bottles being used. So they have that advantage. It has that advantage. You can use a lower quality feedstock, which is important because, as you know, the biggest challenge today for recycling is getting the feedstock. I mean, the feedstock is very limited. And of course, with the right quality. So again, demand for used bottles continues to grow.

32:31 I think the quality of the bottles, of some of the bottles that are left, so to speak, are going to be compromising quality. And that's when I think chemical recycling is going to be very important. But as I say, as far as we know, there are many good ideas. There are a lot of people working pilot plans. But we have not seen really anything that will tell you, OK, this is the one technology that is going to leave this chemical recycling. So I think we still have to wait a little bit. In the case of Corpus, yes, I hear your question about our partners not wanting to proceed.

33:23 Well, at this point, we are not there. I mean, from what we know, all of the partners are interested in pursuing the project. I think with the good performance of the demand on the pet side over the last months, I think, in fact, I could say most of us are more committed to the project in the sense that certainly demand looks better. And whether one of the partners would not like to proceed I think at this point it's a very hypothetical question, Nick. We will consider that when it happens.

34:10 Got it. And margins for caprolactam. Margins for caprolactam have been improving as of recently. We have been operating our plant at relatively low capacity. Again, I assume you're familiar, but with this polar vortex that we experienced in February, there was a big dislocation in the prices of the raw materials, and in this particular case, benzene. Benzene normally has a certain relationship price in benzene in North America, price of benzene in Asia. They are correlated. Very similar prices, perhaps with a difference in freight rate at the most.

34:57 During these past months, we saw a very, let's say, high difference, a very large difference, which has kept us operating this, I mean, in benzene prices being higher, or significantly higher in North America, again, as a result of the supply, because of the polar vortex. So, for that reason, we have operated the plant at low capacity. Last month, The prices became very much aligned, and this month that is still continuing. So we are increasing the rates gradually of Caprolactam. So that's the situation.

35:40 Can you share roughly the contribution you have from this product line in 2021?

35:45 You're asking Caprolactam?

35:50 Yes.

35:51 Well, as I said, we have the plan down for most of the beginning of the year. So it's been relatively irrelevant.

36:01 Got it. So it could be a factor for next year. But so far this year, it just hasn't been that.

36:05 Exactly. So you could see that as an upside.

36:10 Thank you very much.

36:13 Thank you, Nick. Our next question comes from the line of Andres Cardona with Citi. Andres, your audio has been enabled. Please unmute yourself and proceed with your question.

36:23 Good morning, Pepe, Jose Carlos. Congratulations for the results. I have two quick questions. The first one, let's say 2021 has been a very unusual year, right? And so I wonder if you can remind us or like guide us about how should we think about minority interest in particular at the plastic and chemical segment. And if you can flag if there is other relevant Minority Interest. In particular, I would like to understand how much of the $270 million of the recurring EBITDA of the segment belongs to third parties. And the second question is if you may be able to provide some color about the assumption for polypropylene for 2021 and where are the margin nowadays for both polypropylene and integrated PET margins.

37:26 Okay. Look, you're asking the assumptions of polypropylene for 2021? For what we have in the guidance, you mean?

37:37 For the new guidance, yes.

37:39 Oh, okay. Well, let me transfer this call to Jose Carlos.

37:49 So yes, thank you. Basically, as you remember, we started the year with a very low expectation for margins in terms of polypropylene. The more that we see the development, the margin is in the neighborhood of 18 cents per pound. We're actually expecting, as Pepe said, today, as we speak, it's better than that. But as we see it on an average for the year, and especially for the year end, it will average out at around 18 cents per pound.

38:27 And I believe your second question, I'll just answer that one because it's a data point. That's the minority interest within plastics and chemicals. So we have a JB on our polypropylene division with Lion Delta Cell. It is a 50-50 JB. And we have a JB with BASF in polioles, our specialty chemicals. So those are the only minority interests there. The one that has a little bit more relevance is in Delpro for polypropylene. as polypropylene represents roughly half of our plastics and chemicals EBITDA, depending on the year, Andres.

39:00 Thank you, Alejandro.

39:02 Thank you, Andres.

39:04 Thank you.

39:05 Our next question comes from the line of Leonardo Marcondes with Itaú. Leo, your audio has been enabled. Please unmute yourself and proceed with your question.

39:15 Hi, guys. Can you all hear me well?

39:18 Yeah, we got you.

39:20 Thank you. Good morning, everyone. Thanks for picking my questions. My first question is maybe a follow-up from the previous question on the 2022 figures. Just try to get a sense on potential risks on margins for the next year. I would like to know if you guys are seeing any capacity addition in the main market for both PET and polypropylene that could likely impact margins next year. My second question is, my second, sorry, my second question is regarding the recent acquisitions the Alpex has made, right? For the Nova position, it should start contributing with margin during the second half of this year, right? So I would like to know if it is everything on pace with that, And also, if you guys could share a little bit more on the contribution you guys expect for the carbon light acquisition for this year and maybe next year. Thank you.

40:33 OK. Well. In terms of new capacity additions, in North America, we don't expect any new PET or polypropylene capacity. The last addition we saw in polypropylene in North America was the Braskem facility that started up at the end of 2020. As I mentioned also during this presentation, demand of polypropylene in the US, this year has grown approximately 500,000 tons. I mean, for the year. And the new Braskem facility, the capacity was 450,000.

41:22 So pretty much what that is telling us is that the supply demand balance should be very similar to what it was in 2020. OK, so you could expect margins of 2020 too similar to margin 2020, just based on the supply demand factor, OK? In case of PET, as I mentioned, there is no new capacity. And I already mentioned that, in fact, we are short of capacity there. until Corpus Christi starts up.

42:12 So again, and I mentioned also regarding margins of PET, we do believe that in PET there will be an improvement in margins in North America. Polypropylene again, they will go back from very high margins this year to a more normal margin, similar to what we saw 2020. That will be, at this point, our focus. We will review this in more detail and incorporate that in our guidance for 2022 later. But that's, in general, how we see things. Contribution, M&A for carbon light. Okay, I would say at this point, it will not be very relevant, let's say, over the next three to six months, because we're just in the starting phase.

43:11 Once the plan is up and running and assuming everything is going well, we do believe the ABDI will be $15, $20 million per year.

43:25 Okay, great. And for Nova Acquisition, it should start contributing with margins during the second half, right? It's everything on pace with that?

43:37 The Nova Acquisition, you mean?

43:39 Yeah, yeah.

43:41 Well, actually, the Nova Acquisition has been a credit for us since the beginning of the year. In our original plan, the NOVA acquisition was going to actually, we were going to have negative FDA this first year, 2021. But we have had a positive FDA under the circumstances or the margins that we've been discussed. So again, we are having positive FDA and we hope we will be able to improve that for next year as we as we continue to reduce cost and and increase volume particularly with the specialty products of ourselves the volume of ourselves has been has been low this first half of the year as a result the tolling agreement that we have in Asia that has been on hold but but which is extend or renew this agreement as of last month. So we shall continue to see the improvement starting in July. So ABDA for next year should be better than what we experienced in 2021, and certainly much better than what we have anticipated in our original project.

45:12 OK, that's perfect.

45:14 Thank you. Thank you, Leo. Our next question comes from the line of Vanessa Quiroga with Credit Suisse. Vanessa, your audio has been enabled. Please unmute yourself and proceed with your question.

45:27 Okay. Hi. Hi, everybody. Hi, Pepe. Hi, Jose Carlos, Alejandro, and all the team. My question is regarding the, if you can give us an update, Pepe, on the reason why Asian PET margins have remained so strong, and also what kind of visibility do you have that these strength in margins in spreads will reflect for your operations in North America for next year. I wonder if you are already in discussions with your customers regarding the negotiations for next year. Thank you.

46:11 Look, Asian margins have been very strong this year. I hate to bring this up, but in reality, in Asia you have to sort of look at two different margins. One is what we call the China margin, the margin in China. And that has been, you know, during the first half of the year, I would say, was stronger than expected. But right now, as we speak, that margin is pretty much in line with what we had in the guidance. It's around today's, I saw it this morning, I think it was 220, $220, the margin in China, PET margin in China over PX and glycol.

46:58 So margin in China, it was higher than guidance during the first half. Right now, it's similar. But for us, and particularly going forward, the margin that matters is not so much the Chinese margin, but the margin in Asia. And the margin in Asia, traditionally, it has been margin in China plus $30 to $40. So if in China is 220, you would expect margin in Asia to be 250,260. Today, however, you know, margin in Asia is more like in the 300. figure. So what we have experienced in Asia is the fact that China has become more separate from the rest of the countries.

47:51 So now we have an $80 difference. And we believe this might persist for some time. And again, part of the reason of this difference has to do with the fact of the availability and cost of the containers in Asia and China in particular. As containers are not available and freight rates have increased so much, so the prices of PET in Asia have also gone up. In China, I mean in Asia, have gone up and have become different from China. So this is something that is important.

48:38 We had some of our contracts, let's say, with our customers. Some of them were based on China prices, and some of them were based on Asian prices. Going forward, I have to say that part of the important changes that we are doing for next year we're going to move all of our contracts and we're going to reference our contracts to Asian margins, not to China margins. So that should be an important improvement for us going forward. Again, assuming that the difference between China and Asia remains at higher than usual levels. So that's important. But again, China has gone back to normal in terms of margins of debt.

49:32 Asia remains higher than history because they have separated from the from the margins China and again they can do that because they don't have the pressure of having to compete with Chinese products as a result of higher freight rates and and less availability and less particular reliability in terms of shipments so so hopefully that gives you a more clear picture of what's happening with PET in Asia

50:01 Yeah, Pepe, that's very clear. And the feedback from customers has been that this change is reasonable. The reference to Asian.

50:13 Customers are right now, Vanessa, as you can imagine, much more interested in reliability of supply than in $10 or $20 price difference, you know. So yes, I think that all of these factors that I mentioned is part of the reason that we feel confident that we will be able to get an increase in our margins in most of our customers next year. So it's the difference between Asia and China, and again, availability and cost of freight rates. In a way, the two go together. but that's the biggest change that is helping us, I would say move forward with increases for next year.

51:07 Excellent, thank you.

51:13 Our next question comes from the line of Ricardo Resende with JP Morgan. Ricardo, your audio has been enabled. Please unmute yourself and proceed with your question. Thanks, Alejandro. Hi, Pepe, Jose Carlos. Hope you're all doing well.

51:29 Actually, a couple of follow-ups on my side. First one is on the NOVA EBITDA. If I'm not mistaken, a couple of conference calls ago, you had mentioned that the normalized EBITDA of this asset should be something around $20 million a year. So just given how those assets are performing, how close are you to those $20 million a year or you see upside to that number?

51:55 And then the second question also follow up is related to

52:01 M&A. So you're mostly seeing you guys looking at the RPT assets in North America. How do you see the environment in Europe for those assets? Would be that something that you would be looking at or the focus on RPT remains mostly in the US? Thank you.

52:21 Well, Let me start with Nova. I think Nova, as you mentioned, I believe our equilibrium, maybe the, we want to call it, it was in the $15, $20 million. Remember that the capex for that asset was lower than 50, okay? So does it normalize the VDA? We are not there yet. I would say we are a little bit more than 50% of that. In order for us to get there, as I mentioned, we need to grow a specialty part of the business and to continue to reduce costs. Relative M&A in Europe, for ARPET, I mean, we are, as I mentioned before, we're looking at opportunities, particularly in UK.

53:20 with, in fact, one of those opportunities we've been looking at is very much related to a potential chemical recycling, but nothing concrete yet.

53:36 And in addition, we're looking at opportunities in South America where that's something that could be complementary for... We're obviously looking at ARPET...

53:46 opportunities, particularly in the places where we have customers of virgin PET, virgin PET, to complement our offer. So that's right. In South America, and I would even say in Mexico, we're continually looking for opportunities.

54:08 Okay, no, very clear. And if I may just a third question, sorry to bother you guys. But the DV with contour, I remember that you said that we should see an FID by the late third quarter. Does that remain the expected timeline?

54:29 We are reviewing that project that we speak. We will give update probably for the next conference.

54:38 Okay, very clear. Thank you.

54:40 Thank you.

54:41 Thank you, Ricardo.

54:43 Our next question comes from Luis Botero. He asks, great results. How is the process of proactive cultural transformation taking shape in every country? And how do you see it enabling or impacting the positive result achievement in these difficult pandemic times?

55:17 Okay. Look, I think the culture is always a very important enabler of the performance of the company. I think that happens in general. In particular for us, we've embarked, particularly beginning of last year, a month actually before the pandemic started, We completely revisited our, I would say, our vision, mission and values, particularly trying to adapt the culture of the company. Not a drastic change in culture, just adapt to be open to more innovation, more teamwork, And the idea of doing that, of course, is to avoid complacency in the behavior of our people. I think sometimes, and particularly when you are successful, this becomes a big challenge. When you are being successful several years, You sort of become happy with the results and stop looking for more.

56:36 So the biggest push in our effort to improve culture is, what I'm saying is, do not be complacent, to be in a way always trying to improve what we're doing. And the ways to do that is by more innovation, by having more people in the company participate with ideas, Innovation is not something that we can detect from the top up to the organization. It's not like you have five or six people that are very smart and can find ways to improve things. It's an effort that has to come from everybody. So we're working very, very hard at making sure we improve our innovation process.

57:22 And again, we've been doing this for the last two years. And again, together with innovation, the other important factor that we've recognized is that problems and challenges are more difficult every day and come from many different places. So for us to tackle those challenges in an effective way is much better if we can do that in groups, multifunctional groups. And that's why we're also very much working in improving the way we operate in teams. And those two, again, factors in particular is something we're working on a lot. And I think that's going to help us maintain the continuous improvement or transformational improvements in the company.

58:16 Thank you, Pepe.

58:17 That was the last question we had today. Thank you for everyone for participating in today's webcast. Rest assured we will follow up via email if we did not get to your question and make sure to visit our newly redesigned website at alpec.com. Have a great day.