Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q3 2024 Earnings Call

0:01 Good morning everyone and welcome to Alpex third quarter 2024 earnings webcast. I am Bárbara Amaya, Alpex IRO, and I am delighted to be here today with Jorge Young, our CEO, and Jose Carlos Pons, our CFO, who will be covering the webcast presentation. For today's agenda, first Jorge will cover the quarterly overview and discuss relevant events. Next, Jose Carlos will expand upon the financial results and then Jorge will review the outlook for the remainder of the year and elaborate on the revised guidance. Finally, we will be taking any questions you may have. 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.

0:51 Actual results may differ materially, and the company cautions the market not to rely unduly on these forward-looking statements. Albeck undertakes no obligation to publicly update or revise any forward-looking statement, whether it is because of the information, future events, or otherwise. Financial results are expressed in US 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.

1:24 Thank you, Bárbara. Good morning, everyone. I'd like to begin by highlighting that the quarter surpassed our expectations. We observed high ocean container freight costs, which support our regional margins. In addition, slightly improving reference margins and stable demand led to better results. Our comparable EBITDA of $218 million is the highest since 2022. Also, in Q3, Alpec paid dividends of $132 million to its shareholders. In other news, I'm excited to announce that last week, Alfa's shareholders approved the proposal to spin off Alpec.

2:10 Under this process, Alfa's entire share ownership in Alpec will be transferred to a new entity. Since its inception, Alpec has been able to position itself as an industry leader. and in recent years has made the necessary arrangements to become a standalone company. And we are fully prepared for this. The key next steps in the process is for the National Banking and Securities Commission to provide registration for the listing of the new entity, Controladora Altex. Based on the previous spin-off processes implemented by Alpha for NEMAC and Axtell, the Alpex spin-off is expected to be completed in 2025.

3:00 After both entities are trading, there would be a potential to merge them into a single entity to maximize the direct float of the company, which allows us to reach a broader investor base with the potential for greater stock liquidity. I'd like to mention that our board composition and management team will remain unchanged. And this will not have any impact on Alpek's operations, customers, or suppliers. We look forward to this new phase with optimism and excitement. Being a fully independent entity represents an opportunity for Alpek to further strengthen and grow to continue to maximize shareholder value.

3:47 And now I'd like to turn the call over to Jose Carlos, who will discuss financial performance as well as relevant events related to the spin-off.

3:58 Thank you, Jorge, and good morning, everyone. Thank you for joining us today. Allow me to provide greater insight for our quarterly results. Volume increased on a quarterly and annual basis, reaching 1.22 million tons. This was due to stable demand for both of our segments and the normalization of our operations in Altamira. following the temporary water shortage experience in the second quarter. Reported EBITDA reached 198 million, a significant 58% increase year over year, including a combined negative inventory adjustment and a carry forward effect of 18 million. Output generated 218 million in comparable EBITDA exceeding our expectations for the quarter.

4:44 During this quarter, elevated ocean freight costs benefited the domestic market, leading to improved reference margins. These are the highest levels since 2021. However, a downward trend is already developing, with a normalization expected by 2025. Now, let's delve into the polyester segment. Volume resulted in 995,000 tons, representing a 4% increase on an annual basis due to steady demand levels. Asian integrated pet margins remain flat, averaging $297 per ton. Meanwhile, Chinese integrated pet reference margins increased to an average of $166 per ton. U.S. reference peroxidine decreased by 8%, resulting in a spread between North American and Asian prices of $250, 3% lower than in the previous quarter.

5:42 Comparable levita rose to 158 million, a 50% increase from the previous quarter, mainly from high freight costs and solid reference margins. Now, looking at the plastic and chemical segment, volume was 222,000 tons, 10% higher quarter on quarter, reaching last year's levels. This was due to an improvement in regional demand, particularly for the EPS segment. Polypropylene reference margins once again remain flat at 15 cents per pound. Average reference propylene prices increased to 53 cents per pound, up 12% versus the previous quarter. Meanwhile, EPSR recovery as North American reference margins increased to an average of 36 cents per pound, 42% higher quarter over quarter.

6:34 Average reference prices for styrene decreased to 57 cents per pound, down 5% from the second quarter. And finally, comparable EBITDA increased to 63 million, up 22% quarter on quarter as there was no longer an impact from the water shortage at the Altamira sites, particularly for the EPS. And reference margins recovered from the lowest level since the third quarter of 2023. Turning to free cash flow, CapEx resulted in 24 million, comprised mostly of scheduled maintenance. We remain on track to conclude the year below the original guidance as we maintain our strong commitment to discipline capital allocation. We had an investment in networking capital of 43 million, as lower raw material prices were offset by higher volume.

7:25 Finally, regarding the company's financial position, net debt increased to $1.81 billion, while last 12 months reported EBITDA was $590 million, resulting in a net debt to EBITDA ratio of 3.1 times, down from 3.3 times. Dividends includes a payment of $132 million, which was approved and paid to shareholders in September. The decision to pay a dividend was carefully analyzed to ensure it didn't compromise the company's stability while enabling the spin-off of Alpec, which has the potential to generate opportunities for shareholders. The company's healthy cash flow generation allows us to continue our path towards our target and we estimate our leverage will be between 2.7 and 2.8 times by year-end.

8:13 I would also like to highlight that Alpec has maintained its investment rate across all three rating agencies. Earlier this month, Fitch reaffirmed its stable rating for the company.

8:23 Thank you for your attention.

8:24 I'll turn the call back to Jorge.

8:27 Thank you, José Carlos. Regarding our company's expectation for the remainder of the year, In the third quarter, we observed solid domestic demand together with higher freight costs, resulting in a positive outlook for the full year results. Although I'd like to clarify that Russian freight costs have begun to show a downward trend recently. As a result, ALPE has decided to update its guidance figures in 2024. Guidance for comparable EBITDA is now set at 675 million. Guidance for CAPEX will be reduced to $150 million, largely reflecting the continued disciplined capital allocation.

9:13 Volume guidance remains unchanged as both segments continue to experience stable demand in line with our original expectations. We're confident that our structural cost initiatives, our ability to capitalize our position as a domestic supplier, and our focus on strengthening our balance sheet will allow us to conclude this year in a stronger place than we originally anticipated. We are working on our guidance for 2025, and we will share that in the next quarterly webcast in February. Barbara, I'll turn the call back to you.

9:50 Thanks Jorge. At this time, we'll be taking your questions. On this occasion, Eduardo Escalante, Alpha CFO, will be joining us to answer specific questions related to the spin-off of HOTLIC. To ask your question live, please raise your hand. We will call on participants in the order they appear. 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 Bruno Montanari from Morgan Stanley. Bruno, please proceed with your question.

10:38 Hi, can you hear me now?

10:40 Yes. Yes.

10:41 Perfect. Thank you very much for taking my questions and solid results in the quarter. I have a few questions, but I'll limit myself to three quick ones, maybe. On the quarter, can you help us quantify the impact of the benefits from the higher shipping rates in the polyester business? I mean, how much of the increase in EBITDA was driven by the reference margin versus the freight cost? And the second question, I wanted to understand the dynamics of the fourth quarter, because looking at the guidance you revised, It implies in a 15% contraction sequentially and 35% contraction year in year. So wanted to understand what drives the lower results in the last quarter of the year.

11:29 And then finally, if you could give us a quick update on the on the asset sales process, how it has evolved, if we should still see news until the end of the year that that would be great. Thank you very much.

11:44 Yes, Bruno, I'll take your questions. First, on the benefits during third quarter resulting from, you know, the higher ocean freights and the reference margins. If you look into the first two quarters, I think Oribida was probably in the 150 to 160 range. Now it surpassed 200. So, colleague, roughly a $50 million improvement versus the previous two quarters. I think freight is probably most of that, 70, 75%, and the rest would be, you know, reference margins. But we also had during the quarter, you know, we continue to accrue benefits from the cost reduction initiatives that we started since the end of last year. So you continue to see the added effect of the cost savings initiatives.

12:44 Third quarter, we also have, I would say, stable demand. Third quarter tends to be a good quarter for demand for our system. So it's a combination, again, of steady volumes, I think, and better execution. We didn't have issues like the water shortages impacting us significantly, Like in the second quarter, and as I mentioned to you, some tailwinds from the margins. But it's beyond those two factors. I would say the cost reductions and good execution during the quarter. Fourth quarter, typically your fourth quarter tends to be the slowest in volume because of the seasonality.

13:33 So we're assuming, you know, slower volumes because of seasonality and some again reduction in the ocean freights. We're now seeing lower oil prices and a declining raw material environment. So that tends to have also some impact in our numbers and also some cautioning. from the market in terms of their own purchasing volumes. So, Miguel, we're trying to be a fair estimate for the fourth quarter. Maybe it's conservative, but we'll show you the results in the beginning of the year.

14:21 I'll ask Jose Carlos to take the question on the asset sales object.

14:28 Good morning, Bruno. Yeah, regarding the asset sale, we've been making progress on two fronts. One front is kind of the slow moving, selling old equipment, little things that, well, I expect that to contribute around $10 million by year end. That would include certain portions of unused land in some of our facilities. And that is the, I mean, there's more progress that we're making on just cleaning the balance sheet and taking out unused assets. But then there's the other asset, the big asset that we have disclosed in Monterrey, where we're just working diligently to develop alternatives on how best to develop that land. As we have indicated, we're expecting to end the year with a clear idea of how to proceed.

15:19 And we'll let you know, hopefully, by the first quarter conference call in February. We'll kind of give you a kind of an update of what we are foreseeing. So we're doing a lot of work. It's probably not showing at the moment, but it will show soon.

15:36 Very clear. Thank you very much.

15:41 Our next question comes from Ben Isaacson from Scotiabank. Ben, please proceed with your question. Can you hear me?

15:54 Yes. This is actually Victor standing in for Ben. Congrats on the beats and raise. We were just wondering if you can talk a little bit about a possible shareholder rotation following the alpha split. Do you expect people who just want to hold alpha to come to market with their shares?

16:17 For us, we're not in position really to guess what the shareholders might be. I think we bring certain attributes for shareholders that we expect they find attractive, but ultimately it's their portfolio. I'll let Jose Carlos also complement this answer.

16:50 Maybe just complementing what you're saying, Jorge. I mean it's been a request from many shareholders or investors from a long time to gain additional liquidity for a stock. So in the ultimate phase of this process of the spinoff, I think we will be able to answer that request that we've been getting for the last five or whatever years. So I think investors might now see the possibility of having a portion of a stock that is traded highly, but also that could potentially access all the stock indexes here in Mexico that will also give it additional appeal.

17:28 So in the long run, we think it's a positive event. It's the initial phases where the investor will have to make their choices. But I think in the long run, it's a very positive event for Alpek to get to that additional liquidity that we expect from the spin-off. We agree. Thank you. And then if I can follow up to Bruno's question, can you talk a little bit more about the cadence of debt repayment? I know we were talking about the 2.5 by year end, but it was dependent on asset sales. Now that the dividend is out of the way, what kind of cadence do you expect?

18:09 Respecting, as I already indicated, to end the year between 2.7 and 2.8 times, so that's the double effect of reducing gradually the debt by recovering some working capital and using excess cash flows to pay down debt, but also the improvement of last 12 months EBITDA, as it will contribute significantly to our leverage. We're expecting to have reached the 2.5 times probably by the middle of next year, hopefully sooner, and I will be able to surprise you, but that's more or less what we're forecasting. Thank you.

18:51 Our next question comes from Pablo Ricalde from Itaú. Pablo, please proceed with your question.

19:04 I don't know if you can explain if it's basically you're delaying that capex to 2025 or you're basically stopping some projects just like understanding better the lower capex guidance and the second one it's on the contracts if I'm not mistaken you usually negotiate the contracts around November so I don't even provide visibility of what's going on that front

19:31 Yes, I think on the CAPEX revised guidance, to a significant extent, we have prioritized the cash flow. We have prioritized the maintenance of our facilities, so there is no reductions at all in our maintenance CAPEX. We have, again, delayed some of the projects. We have found ways to spend less money in some of the projects. And again, it's been an area of priority for us to improve in our cash flow. And CapEx is one more of the elements. What was the second question, Pablo?

20:18 The process on contract negotiations, which is typical for this season, is in the early phases. I think we have some conditions that right now are favorable to us, even though the ocean freights have

20:48 They are still somewhat elevated. So I think that should help us be more competitive generally to import alternatives. There is also, I would say, stiff competition within the region. But we would expect again some favorable factors again mainly because imports are less competitive at this time. Again, we're seeing the ocean freights coming down, but they remain somewhat elevated. For sure, by our next call in February, now many of these contracts are done and that will be reflected in our 2025 guidance. Perfect.

21:39 Thanks.

21:45 Our next question comes from Leonardo Marcondes from Bank of America. Leo, please proceed with your question.

21:53 Hi guys, thank you. Thank you for picking my questions here. I have only one actually. So it's regarding the PET spreads. We have seen them quite weak in the recent past, right? So I was wondering if you guys, What do you guys see as potential upsides in the near future? I mean, what are the key drivers that could bring margins up in the short to mid term that could help margins going up now that ocean freights have come down? Thank you.

22:33 Yes, I think the, you know, the reference PET spreads, which what we report are the Asian, both China and the spread for this Asia, excluding China. The reference spread for China has increased recently. I think there was some expectations on Thank you very much. Thank you. Excess capacity, especially in Asia. And I think they have, in our opinion, they have already reached the bottom.

23:38 They have again rebounded recently. But we again, we expect they will remain either steady or maybe actually coming back down to levels we saw earlier in 2024. I think the low point happened maybe in the second half of 2023. and it's basically because of the additional capacity Asian spreads other than China maintain a decent premium an attractive premium over China and those are also very significant for for our business and and and obviously the other key factories ocean freights that's a different variable that's not related to the excess capacity of the electrochemical industry And again, it's the combination of those variables that is quite relevant for us.

24:32 But again, we would expect perhaps from the most recent weekly and monthly levels, maybe some slight correction down on the China reference margins, but perhaps higher than what we saw at the end of last year and maybe the very early months of this year.

24:53 Perfect. Just one follow up here on the freight rates. How do you expect them to behave to the end of the year? Should they stay at October's level or do you expect them to continue dropping?

25:09 It is hard to say, Leonardo. I think we probably would expect some further reductions. but for example the last weekly data point was steady so which is a good signal we would expect to have some level of higher freights in all cases because the disruptions on shipping routes continue so those will have to fully normalize for the cost structure of the shipping industry to Again, to go back to the levels that we saw in 2023. So again, there might be still some downward trend, but there are also signs that we might be getting close to a plateau, which if they get steady where they are today, wouldn't be a bad scenario for us.

26:07 Very clear. Thank you.

26:11 Our next question comes from Tassel Vasconcelos from UES. Tassel, please proceed with your question.

26:21 Hi, Jorge, José Carlos, Eduardo, Bárbara. Thanks for taking my questions. I have two questions here on capital allocation focused on dividends. It's clear that target in the short term is in reducing leverage. And as you mentioned, you might end the year at 2.7 or 2.8 times. Potentially reaching 2.5 times by mid-year. Even if you decide not to pay any dividends in early 2025, can this decision be changed throughout the year? Similar to what happened this year, for example, even though it was at different circumstances. And a second question, maybe I'll follow up on this one. Post the spin-off from Alpha, would it make sense to have a more clear dividend policy at some point? I know that it's a cyclical business, but maybe something linked to cash flow, similar to what Petrobras has, for example.

27:18 As long as you have debt below such level of target, we'll pay X percent in dividend as cash flow, for example. Would that make sense? Those are my questions. Thank you.

27:35 Thank you for your questions. Regarding capital allocation and dividends, certainly we will continuously monitor the performance throughout 2025. And if there is potential to paying a dividend, as we have done for the last 10 years, probably with a second one, we will pay a dividend as our shareholders appreciate that and see IPEC as a good cash flow company. So certainly it doesn't mean that we're not envisioning paying a dividend at the beginning of the year. That doesn't mean that we will not pay a dividend by the end of the year. So I think that's open. And regarding dividend policy, I mean, there's mixed signals. I'll tell you, for us, it's very important having an investment rate rating in our debt.

28:22 and we will not compromise our rating based on paying a dividend so sometimes that's a trade-off and having such a clear dividend policy might put us in a square we wouldn't want to be and also Eduardo Ochoa- Extraordinary events come such as good opportunities to invest that what might be a trade off between paying a dividend as we believe it's a good opportunity to create great value for shareholders so Eduardo Ochoa- We hear the message. Let us think about it, but I think it needs to and consider ratings and opportunities to invest.

29:01 Carlos Bernal- That's clear. Thank you.

29:09 Our next question comes from Andres Cardona from Citi. Andres, please proceed with your question.

29:16 Hi, Jorge, Jose Carlos, Eduardo. Good morning. Congratulations on the results. I just wanted to follow up on the previous question because now that you are becoming a fully independent company, And there is no longer a holding that it's on the need of dealing payments. It offers an opportunity for the company to rethink its strategy priorities. So I just wanted to understand if maybe this structural change that Alpec is having may allow it to, I don't know, make more emphasis on growth or do you envision yourself as you have maybe Luis Fonsi, Eduardo Fonsi, Eduardo Fonsi, What was the level, maybe as a price range, for the 2024 contracts from an integrated PT margin perspective?

30:33 That's it. Thank you for the space to ask.

30:40 Yes, Andres. As Jose Carlos mentioned, We believe our shareholders appreciate dividends when Alpec has paid. Alpec has a track record of paying dividends throughout its history, and we acknowledge that's important. I think Altec has been able in its recent times to balance growth and dividends. I think our shareholders historically have been supportive of our strategies. I think this is an important milestone because of the spin-off.

31:30 But I think the fundamentals is what Jose Carlos described. I mean, if we generate the cash flow and we have very attractive opportunities to invest within the business, I think our shareholders will be the most interested ones that we capitalize those opportunities. And again, to the extent we balance with a steady dividend payments, I mean, we continue to do that. We know that's something the investors appreciate. And again, I think we will continue to think that strategy. But again, so far, ARPEC has demonstrated and achieved actually A combination of growth while paying a dividend.

32:22 So I think we want to remain flexible, but we also acknowledge the dividend stability is something investors appreciate. So we will navigate that as opportunities arises. And again, as I mentioned earlier on the contract, I think that's an opportunity to make the regional supply more competitive relative to imports. Again, there is also regional competition. But again, we expect some conditions that could be, you know, at least moderately favorable for, you know, for our products.

33:29 But again, we're just beginning the season. And again, we report the outcome into our expectations in our calling in early February.

33:53 Our next question comes from Hector Ugarte from Compass. Hector, please proceed with your question.

34:00 Hi, everyone. Thank you for taking my call. Just wanted to ask you about your guidance. It will seem to me that it makes sense to have a lower expectation for fourth quarter results and third quarters. But at the same time, you will be expecting something like a little bit over $140 million for EBITDA for fourth quarter. And that will seem to me that it's mainly like considering that all of the macro conditions that put your results on third quarter would like disappear, right? So Do you believe this is moral of conservative guidance or do you really expect a market deterioration going forward? Thank you.

34:44 It's a good question. I mean, as we mentioned, we are assuming the ocean freights will come down relative to third quarter. We assume the seasonality of typical of our businesses pretty much across the board all our businesses are seasonal towards the fourth quarter and we also are in an environment where oil prices and raw material prices have declined and that might have some again some impact as you know the market might be more cautious in their Purchases expecting to replace those volumes with lower prices.

35:35 It's still early to judge the forecast as we were still through the first month of the quarter. I think there is a chance it could be more than the implicit $144 million. That we have in the guidance, but that's our best estimate as of right now. I think there is a chance to be better, but that's where our analysis is coming up now.

36:07 Okay, great. Thank you.

36:10 Our next question comes from Alejandra Andrade from JP Morgan. Alejandra, please proceed with your question.

36:17 Hi, good morning. Thank you for taking my question. I actually have two first just wanted to ask on expectations for working capital in the fourth quarter. And then secondly, when you were talking about deleveraging you were talking about, you know, potential debt repayment so far this year, I mean you did repay some debt. earlier in the year but obviously with the dividend payment you had to take on new debt to fund that so ultimately you know there hasn't really been any meaningful debt reduction but rather the leveraging has come from higher EBITDA so just wondering if we should be expecting any type of debt repayment going forward or if it's you feel comfortable just with with EBITDA kind of driving additional the leveraging things

37:04 Alejandra, thank you for your question. Yes, we're expecting an improvement in working capital for the fourth quarter. So far this year, we have invested in working capital Again, if you compare to the last quarter of last year, we had solo working capital, we had a destocking. So there were many factors. So the comparable point, it's not that fair. But in the end, we're expecting to have a gradual improvement in working capital in the fourth quarter. So that would expect to release some cash flow in this fourth quarter. And you're totally right. We were expecting to repay that during this year, but we had a decision for the dividend. So that's more or less maintain the absolute amount of debt that we have had. But it is our strategy to start repaying that, especially those that we have on the facilities that we have on the 26th.

38:02 We're expecting to repay a portion of that in the fourth quarter. How much is I think it's to be decided based on the cash flow of the fourth quarter?

38:12 Great. Thank you so much.

38:14 Thank you.

38:15 Our next question comes from Sophia Martin from JVM. Sophia, please proceed with your question.

38:25 Hi, thank you for taking my call. Do you have an estimate on the impact on SG&A that would come from the decision from Alpha or whether there would be another impact on costs? I understand that there are several services that Alpec receives from Alpha. And I just have a second question as well. Should we consider a normalized or a mid-cycle EBITDA number of around 8 million going forward? And do you have any sort of estimate for next year? Thank you.

39:02 Yeah, I think on on the questions, you know. No, we don't expect any material changes. I think has been already for several years. Preparing for the spinoff in terms of its ability to have its own systems, its own services. Yes, there are still some relationships, but those have been winding down over the years and we wouldn't expect a material change. Your question, I guess, on the guidance is $800 million that you mentioned. Yes, I mean, in the past, we have mentioned a range of 800 to 900 as a mid-cycle EBITDA figures. I mean, our third quarter was actually within that range.

40:02 We still have reference prices on the low end in that quarter. Even though our volumes were steady, compared to other years, they were still lower, right? I mean, we have had big years. Today, the volumes, I would say, this year, I would say they're still a little bit maybe below what we would consider the long-term cycle. But we have a very positive effect on the ocean freight. So yes, I mean, we continue to say that's our mid-cycle range. Obviously, many variables impact that range and our numbers in general.

40:50 But again, we We have continued to focus on the factors that are within our control. I think we have made significant steps to improve our cost structure or footprint. And I think operating well and commercializing well our products is key to be within that range or beat that range. I think for 2025, again, we are just in the process of We have a question coming from the chat. I will proceed to read the question.

41:52 Please could you quantify cost reductions initiatives so far in 2024 and what's the expected structural cost savings for 2025?

42:00 The cost reduction savings as we have mentioned in previous course for this year, I think we have achieved roughly $75 million on annualized savings. I think we have other initiatives in the works. I think we will present those in the first quarter, but potentially that number of 75 could grow to roughly $100 million of savings rate by sometime the middle of next year. So we will again share with with you other potential optimization initiatives and that would be so we would expect that's an ongoing activity in ALPEC to always strive for efficiencies and cost improvements and again there are some more on the works and 75 achieved we're targeting to that number to get to 100 by by middle of next year

43:16 That was the last question in the queue. Thank you everyone for joining our broadcast. Have a great day.