Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q2 2023 Earnings Call

0:01 Good morning and welcome to Alpex second quarter 2023 earnings webcast. I am Antón Fernández, Alpex IRO, and today I'm glad to be joined by our CEO, Jorge Young, and our CFO, José Carlos Pons. Let's start by reviewing what we will be covering today. First, Jorge will provide context for the query results and elaborate on relevant events. Second, Jose Carlos will cover Alpec's second quarter financial performance. Third, updated guidance figures for the year will be discussed. And afterwards, we'll 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.

0:53 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. I'd like to remind everyone that this webcast is being recorded and will be available on our website at alpec.com. I will now turn the call over to Jorge.

1:24 Thank you, Anton. Good morning, everyone, and thank you for joining us. I'll start off by highlighting that we have a comparable EBITDA of $201 million in the quarter and a significant improvement in free cash flow. reaching $216 million in the quarter, primarily from networking capital optimization. Now, let me provide some context for the quarter's performance. From an industry perspective, we're witnessing two particular factors. First, as China's economy continues to be softer than originally expected and with ocean freights back to historical levels, There is currently greater influence from Asian imports in the Americas, mainly for PET and EPS businesses.

2:19 Second, North American feedstocks, such as paraxylene, maintain a disconnection versus Asian prices. We're taking action to mitigate these effects. Meanwhile, from a market perspective, consumers primarily in the Americas are moderating certain expenditures impacting the packaged goods, appliances, and construction industries, thereby affecting purchases during what is normally the start of the peak season. These effects have led to lower than expected volumes. Notwithstanding, We're confident that our end markets will continue to be resilient.

3:08 Now, let's review the reference margins for our core products. For polyester, Asian integrated PET reference margins were 3% lower versus the previous quarter, averaging $332 per metric ton, in line with our expectation for the year. However, I would like to highlight that Chinese reference margins are becoming more relevant, particularly for our Middle East operations. These margins averaged $225 per ton, yet they closed at $203 per ton in the month of June as more Chinese supply has entered the market. As new capacity in the region has been ramping up, Polypropylene reference margins have stabilized, still averaging 17 cents per pound in line with our expectations for the quarter.

4:08 EPS reference margins have continued to normalize, now with an average of 44 cents per pound, a 10% reduction quarter over quarter. And as mentioned earlier, Reference ocean freight costs have returned to previous levels, resulting in a reduction of import parity pricing, which particularly impacts PET and EPS. Moving on, I would like to highlight an important event that occurred just this week. ALPEC is refinancing the outstanding balance from the 2023 bond due in August with bank debt that includes $200 million sustainability link loan maturing in 2028. This represents Alpec's first transaction with an ESG component with key KPIs on carbon emissions and safety targets.

5:11 We reiterate our commitment to all the targets we have established. Moreover, we have launched a project to add installed capacity to produce approximately 26,000 tons per year of EPS, expandable polystyrene, with recycled content in North America. This will be mainly focused on medical and electrodomestic applications, as well as major appliances. The startup is expected by the end of next year. At this point, Jose Carlos will review the financial results.

5:50 Thank you Jorge. Hello everyone. It's great to be here with you today. Let me go into greater detail regarding the quarter. Overall volume was 1.2 million tons, an increase of 3% quarter over quarter as the beginning of peak season partially offset other factors. Comparable levita was $201 million, which is a reduction of 3% versus the previous quarter. and there was a significant improvement in free cash flow. Now, if we delve deeper into each segment. For polyester, volume was 994,000 tons, 5% higher quarter on quarter due to a slight demand recovery. However, it's still not at the levels we expected for the summer months. While in plastic and chemicals, volume was 213,000 tons, a reduction of 4% quarter on quarter as demand across the portfolio was affected by lower consumer spending as previously stated.

6:47 And polypropylene dealing with a more supply in the Americas. However, we expect to regain some momentum in the second half of the year. Moving on to raw material price dynamics, US reference paraxylene prices increased by 1%. Yet, the disconnection between North American and Asian prices grew by 7% versus the previous quarter. This spread increased to $282, which led to imports arriving in the Americas with more competitive prices. In the plastic and chemical segment, average reference propylene prices decreased to 40 cents per pound, a 20% decrease when compared to the previous quarter, primarily due to the recently incorporated propylene supply in the region.

7:33 Switching over to the EBITDA breakdown, overall comparable EBITDA was $201 million, 3% lower than in the previous quarter. As previously explained, we saw greater influence from Asia, which resulted in lower than expected volumes across our product portfolio, and a decrease in reference margins, particularly for PET and EPS. Reported EBITDA was $148 million, 21% lower quarter on quarter, and this result also included the following. A combined carry forward effect and an inventory adjustment of $40 million as raw material prices have decreased. A 13% million dollar loss primarily related to a non-cash hyperinflation effect in Argentina.

8:18 And a slight impact to our fixed and utility costs from depreciation of the Mexican peso. If we take a closer look by segment, polyester comparable levidad was $127 million, 4% lower versus the previous quarter. And in plastic and chemicals, comparable levidad resulted in $70 million and 9% decrease quarter on quarter. In terms of free cash flow generation, CAPEX totaled $75 million and was mainly allocated towards the construction of the Corpus Christi Polymers Project and for scheduled maintenance. Networking capital investment was significantly improved by $284 million, achieved from a strong focus on managing inventories and collecting receivables.

9:03 This figure significantly surpassed initial expectations for the year and resulted in a positive free cash flow of $216 million for the quarter and $186 million year to date. Regarding the company financial position during the quarter, Alpex net debt decreased to $1.9 million, while last 12 months reported EBITDA was $827 million, which led to a leverage ratio of 2.3 times net debt to EBITDA. Thank you, everyone. I will now turn the call back to Jorge.

9:38 Thank you, Jose Carlos. In terms of guidance, we originally provided annual figures based on market condition at the beginning of 2023. However, as industry outlook has changed, the company now has a more conservative view for the second half of the year. Regarding our assumptions, we expect Asian integrated PET reference margins at an average of $220 per ton. Although we did not provide guidance for Chinese PET reference margin, we are foreseeing figures below our original expectations for the year that will continue affecting our annual performance.

10:25 Considering ALPEX guidance figures, we are updating the following. Overall volume of 4.65 million tons, slightly below from previous levels due to the market conditions visible at the moment. A modified figure for overall comparable EBITDA of $770 million. Net sales of $7.7 billion. CAPEX is now set at $300 million as we continue to look for efficiencies in our investments. ALPEC remains committed to maintaining its financial stability in a prudent leverage for the company. As such, we don't expect an extraordinary dividend payment later this year.

11:13 Additionally, we expect to continue with solid performance regarding free cash flow generation. Furthermore, we will continue progressing towards our long-term strategy, maintaining our competitiveness through cost improvement initiatives, footprint rationalization, and continuing to evaluate optimizations of our portfolio. Thank you for your attention. I will now turn the call back to Anton to open the webcast for Q&A.

11:44 Thanks Jorge. At this time we will be receiving your questions. To ask your question live, please raise your hand. We will call on participants as they appear. You may also type your questions through the Q&A function. We will attempt to cover as many questions as time allows. The first question comes from Leonardo Marcondes with Bank of America. Hi, Leo. Please proceed.

12:12 Hi, guys. Hi, everyone. Thank you for picking my question, Jorge, Jose, and Anton. So my first question is regarding the guidance. We saw that your expectations for PET remained unchanged. But was there any change in PP and EPS spreads in your forecast? My second question is regarding the working capital. The company released a good amount of working capital in this quarter, right? And according to you, it was due to several optimizations and improvements in inventory management. So I was wondering if you guys could provide a bit more color on this. Thank you.

13:04 Leonardo, thanks for your question. I think in terms of the guidance, I don't think we did provide a breakdown by business. I think both of our business are facing similar influence from the current market conditions. So I wouldn't characterize it that only one segment is influenced by the current market conditions. I think both of them, and again, we didn't provide a very specific by business unit, but in general, both have some influence. And on working capital optimization, we did reduce the number of days outstanding of working capital.

13:52 uh much closer to our to our target i mean we we are very close to the target still probably a couple of days uh above our target and we will continue to to evaluate but that's mainly the the reason as markets were softer in the first half we had you know we had been preparing our for production plans for somewhat higher volumes and And we naturally took the adjustments during the first half of the year and they were more visible in the second quarter.

14:30 Maybe just follow up from the first question here. I mean, it was the decreasing in the guidance, in the EBITDA guidance, mainly due to volumes and also due to the effects appreciation we have been seeing over the past months and weeks, or Or the petrochemical spreads have also changed in our view for the remainder of the year, particularly for PPE and EPS. Thank you.

15:07 Yeah, as I mentioned earlier, I think there is a combination of, you know, volumes below our original expectations for the year. And generally speaking, as we have in this year in particular, more influence from I think there is some impact on our margins. So it's a combination of both. Now on the peso, a strong peso, yes, it also provides some headwinds for our resources. It influences some of our costs in dollars, especially fixed costs and certain energy costs like electricity.

15:48 Okay, very clear. Thank you. You're welcome. Thank you Leo.

15:57 The next questions come from Luis Carballo from UBS. Hi Luis, please go ahead.

16:05 Hi, Jorge. Jose Carlos Edmundo. Thank you. Thank you for taking the question. I have basically two from here. The first one is about gap allocation, right? I mean, you basically reduced the EBITDA guidance for the year, maybe on the industry dynamics. You also, in a certain extent, trimmed the CAPEX for the year. I mean, Jorge already mentioned in the call that probably dividends in the second half will be lower than initially expected. So just trying to understand with this current dynamics, how you're seeing the priorities in terms of keeping the investments, So, just trying to get a bit more color on this.

16:52 And the second, if I may, is it's basically if you can provide a bit more, you know, update on the Corpus Christi development and, you know, mainly with regards to the new or this current industry dynamics, how you're seeing returns and the development of the project. Thank you.

17:12 Yeah, Luis, thanks for your questions. Yes, I think we have a, you know, slightly adjusted or capex that doesn't reflect fundamental changes in our strategy. I mean, we normally continue to optimize our capital expenditures. Sometimes, you know, it takes more time to prepare the projects. Right now, I think it's important also to, you know, Be careful with our leverage. Right now it's 2.3, but it will likely increase as we go through the year once we factor 12 months of the current EBITDA. And that's why working capital remains an area of focus.

17:59 But as a company, we are very committed to keeping our leverage no more than 2.5 times. So I think we will have, again, some short-term pressure on that index, and that's why it's It's more appropriate right now to have a significant focus on the cash flow because we are again very committed to maintaining a very healthy financial ratios and that's pretty much the context of our decisions. On Corpus Christi progress, I mean, we continue to monitor the progress of the project.

18:44 Um, no, nothing in particular, uh, to report that is different from our, from our last quarter. Um, you know, I think that project has, uh, uh, you know, we continue to watch it and follow up and monitoring the progress and expect it for some time in 2025.

19:10 Okay. No, very clear. Thank you. Thank you very much. Thank you, Luis. Our next questions come from Sophia Martin from GBM. Hi, Sophia, please go ahead.

19:29 Hi, thank you for taking my question. I just wanted to know, would we be seeing an outstanding dividend for the rest of the year? Thank you.

19:42 Hi Sofia, I just mentioned that at this moment we don't expect the second or an extraordinary dividend for later this year. Thank you Sofia.

19:59 Thank you. Our next questions come from Edward Palma from Vice Investment Asset Management. Hi Edward, please go ahead with your question.

20:11 Hi, guys. First of all, thank you for this presentation. I have two questions mainly related to CAPEX and also the cash flows of the company. For the cash flows, I would like to know if you can talk about the higher feedstock that you mentioned in the press release. And for the CAPEX questions, It's about the physical progress about Corpus Christi.

20:52 Hi, Eduardo. Thanks for your questions. On Corpus Christi, again, we don't report the very specific details of the progress of the project. As I mentioned, we continue to monitor its progress and we don't have Significant updates from what we shared the last time. Right now the timeline remains for 2025. The other part of the question on the feedstock, I think that's less related to working capital. I think that's more related as a headwind we have currently in our competitiveness. And as I mentioned, I think we have, Concrete plans to start reverting those effects and normalizing.

21:44 It will take some time, but that's, I would say that's more an EBITDA impact rather than a material impact on cash flow.

21:57 But the higher cost in Fitchock is related to

22:11 I think it's more related that the feedstocks in the North American market where we have some of our supplies coming from. We have other sources of supply from overseas. But the ones in particularly in the North American market have additional cost pressures that are not experienced by other regions on alternative alternative values for the feedstocks needed to produce paraxylene which is for the key petrochemical we buy so that's the that's what we call the the disconnect okay thank you thank you edward

23:02 Our next questions come from John Baptiste Bruni from BBVA. The questions comes from the Q&A function. So John has three questions. The first one is, at the end of last year, management was seeing a bottom cycle EBITDA of $1 billion, already challenged by new guidance. We are aware that there are many moving parts, effects, volumes, etc., but can we see the 770 level as the new cycle bottom? Second question is understand that you are mentioning CCP deployment and still expect a startup in 2025. But can market cooling conditions could imply some delays?

23:50 And the third question is related to OTAL. I know you don't comment performance of acquired businesses, but if you could just mention if its performance since consolidation is in line better or weaker than what we have been anticipating.

24:09 Okay, on the first question, yeah, I think we would characterize the $1 billion perhaps as closer to mid-cycle. And I mean, today, based on some of the key variables that we follow, we think our number is closer to the lower end of the cycle. I think it will be very difficult to characterize what is exactly The bottom, but right now I think we have some, you know, some of the macro variables like, um, you know, the reference margins and especially the Chinese reference margins, these, uh, more recent issue, but exciting disconnect, uh, I would say much closer to what we would call the bottom, um, of the range that impacts us.

25:05 And again, the one billion, I would characterize that more as a mid-cycle level or target that we still keep. Nothing really to add on the Corpus Christi from what I just answered recently in the previous two questions. On OCTAL, yes, we don't disclose that. those numbers specifically but so far has been a a positive performance on our system and very competitive asset you know very committed people and it's been delivering according to our original expectations and and the first year was significantly above because it was in In the peak of the cycle, but even today still delivers above our expectations, it has again a reliable and very competitive operation and outstanding feedstock position.

26:18 Thank you, Jan. What was the last question in the queue? As always, I'd like to remind you that you can find both a video recording of today's webcast as well as a transcript on our website at alpec.com. Thank you all for participating in today's Alpec webcast. Have a great day.