Alpek, S.A.B. de C.V. (BMV:ALPEK/A) Q4 2020 Earnings Call

0:00 You are connected to ALPEC's webcast presentation. I will now turn this call over to Mr. Alejandro Elizondo. You may begin.

0:09 Thank you, Laura. Good morning, and welcome to ALPEC's fourth quarter 2020 earnings webcast. I'm Alejandro Elizondo, ALPEC's investor relations officer, and I have the pleasure of being joined by our CEO, Pepe Valdez, and our CFO, Jose Carlos Pons. Please turn to slide two. This presentation is divided into two parts. First, Mr. Valdez and Mr. Ponce will provide commentary on Alphex's fourth quarter 2020 performance and outlook for 2021. Afterwards, we will move on to the Q&A session. Please note that 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 unduly rely on these forward-looking statements.

0:58 Thank you, Alejandro. Good morning, everyone, and thank you for joining us today. I hope you are all staying healthy and well.

1:29 Turning to slide three, I would like to start by highlighting the main topics for today's call. First, the company continues to successfully navigate challenges of the COVID-19 pandemic, experiencing record demand across its public portfolio. Also, Altec has surpassed financial performance expectations during 2020. Jose Carlos will review this in greater detail. We will also discuss these strategic initiatives that have enhanced our ARPEC capabilities and further solidified our market position. As many of you know, ARPEC has played greater emphasis on furthering and properly communicating its ESG initiatives, and we want to share our results for this year. Finally, we will elaborate on the 2021 guidance which we released this morning.

2:32 On slide four, we will discuss APEX performance amid the continuing COVID-19 pandemic. Before going into specifics, I would like to express our deep sense of gratitude for the effort our employees displayed during an unprecedented year such as this one. beginning in early 2020, Altec quickly adopted updated technologies and critical safety measures to enable employees to continue working efficiently, both from their homes and at our facilities. Through these successful measures, but more importantly, because of the collective effort, we have emerged from 2020 as a stronger company, achieving the highest annual volume in our history.

3:22 APEC has continued to experience strong demand across its entire portfolio during the fourth quarter, operating near capacity in all its PET and EPS business lines. In addition to the strong PET demand stemming from favorable changes in food and beverage packaging during this quarter, we also saw a rise in the use of EPS for packaging in e-commerce as well as in the newfound application of EPS in the transportation of COVID-19 tests and vaccines. The reason is its unmatched thermal insulation and shock absorption properties, as well as the fact that it is incredibly light. We believe some of the strengths will have a lasting effect on nowhere demand in the years to come.

4:14 Thank you for your attention. At this point, I will turn the call over to Jose Carlos, who will go into more detail regarding our financial results.

4:26 Thank you, Pepe, and thank you all for participating in today's webcast. Turning to slide five, I want to highlight ALPEC's solid performance throughout last year. In 2020, ALPEC experienced record overall volume, driven by favorable dynamics in PEP, and an increase in plastic and chemical demand for the packaging and e-commerce segments. Also, quarterly and annual comparable levy that exceeded our guidance. Strong free cash flow generation as Alpec optimized networking capital and strengthened its focus on CapEx efficiency, resulting in a significant debt reduction. And a recovery of $40 million in guaranteed debt from M&G Mexico.

5:12 As you can see in slide six, Apex's overall annual volume surpassed 2019 results by 10%. This is a record for any full year, as well as for any fourth quarter in our history. In the polyester segment, PET volume remained at strong levels, similar to 3Q20, and not showing the typical signs of demand seasonality, as changes in consumer patterns in terms of hygiene and safety continue to support demand. would have been even higher during the quarter had we not experienced an interruption to energy supply in the U.S. Gold Coast, as well as an extended power supply interruption at our Pearl River facility, caused by a hurricane in the region.

5:57 In plastics and chemicals, volume also remains strong, especially in the EPA segment, further increasing given the incorporation of NOVA's expandable Styrenix business. Moving on to raw material price dynamics on slide seven, as COVID-19 vaccines gradually begun to be distributed, we saw a modest increase in demand for refined products such as gasoline, diesel, and jet fuel, which combined with the reductions to crude oil supply resulted in average Brent crude oil increasing to $44 per barrel, 4% higher than in the previous quarter. Paraxylene prices also increased by 4% during the same timeframe, reflecting the price increase to crude oil. And propylene prices spiked to an average of 41 cents per pound, as hurricanes in the Gulf Coast lowered production, thus pressuring supply.

6:55 Turning to slide eight, we see that the fourth quarter comparable levy that excluding raw material carried forward was $151 million. only 2% lower quarter-on-quarter, as volume across both segments as well as margins, particularly for polypropylene and EPS, continue to be strong. Reported EBITDA was $201 million, 13% higher quarter-on-quarter, as this result includes a non-cash inventory gain of $9 million, a positive raw material carry-forward effect of $9 million, and a one-time non-cash gain of $35 million from the business combination of the Wilton Pet Site. Shifting our attention to results by key segment, we can see that polyester-comparable levida, excluding raw material carried forward, was $81 million, declining by 15% quarter-on-quarter.

7:52 This decrease was the result of a slight reduction of 3% versus the third quarter's record volume, as well as a 3% quarter-on-quarter decline in integrated HMPET margins to $242 per ton. Meanwhile, plastics and chemicals comparable levita was $66 million, an increase of 18% quarter-on-quarter, as volume increased by 9% versus left quarter, supported by increased EPS demand from packaging for e-commerce applications and the NOVA chemicals acquisition.

8:28 In addition,

8:29 Polypropylene margins increased by 31%, as hurricanes in the Gulf Coast adversely impacted local producers and inventories. Moving on to analyze results on slide 9, 2020 comparable levied debt excluding raw material carry forward was $601 million, vastly exceeding the original guidance figure of $517 million by 16%. mainly due to better-than-expected volume and margins across both segments on an analyzed basis. This figure was lower versus 2019 due to stronger PET and polypropylene margins last year. When comparing 2020 and 2019 reported EBITDA, it is important to note that 2019 consolidated EBITDA included an extraordinary $188 million gain related to the sale of Alpex cogeneration plants.

9:24 as well as a $68 million non-cash inventory loss. And 2020 consolidated EBITDA includes an extraordinary non-cash gain of $35 million from the business combination from the Wilton pet site, as well as a non-cash inventory loss of only $35 million. Turning to slide 10, APEC generated $350 million in operational free cash flow in 2020. Finishing the year, $392 million higher than our original expectations. As we expressed last quarter, an important element of the company's long-term strategy is maintaining financial stability and strong free cash flow.

10:09 Actions related to this strategic objective included, number one, a strong focus on CapEx efficiency, which ended at $162 million for 2020. 40% lower than the previous year and $115 million below our guidance, without sacrificing any strategic opportunities. Two, an improvement of $167 million in networking capital this year, resulting from optimization of inventory levels, improvement in supplier and customer credit terms, and feedstock price declines. And finally, the recovery of $40 million in guaranteed debt from the conclusion of M&G's Mexico restructuring in 2020, with $120 million plus interest to be received over the next four years.

10:57 Switching over to slide 11 and regarding our financial standing, Outback was able to further reduce net debt by $49 million during 4Q20, ending the year with $1.19 billion as a result of a strong free cash flow generation, as we just discussed. This resulted in a solid leverage ratio of 2.1 times net debt to EBITDA, well below our target of 2.5 times, and up slightly as our EBITDA no longer reflects the extraordinary income from the sale of our core generation assets in 2019. If we consider comparable EBITDA excluding raw material carry forward for our leverage calculation, the figure will show that we have remained at 2.0 times throughout the last three quarters.

11:43 Thank you for your interest. I will now turn the call back to Pepe.

11:49 Thank you, Jose Carlos. Switching over to relevant events on slide 12. As I have mentioned, I'm very proud of our team's accomplishments for 2020. As you are aware, in the fourth quarter, we finalized the acquisition of NOVA Chemicals, a ceramics business. and today I would like to spend some time discussing our progress regarding recycle pay. Looking back to the second quarter, Altec set a goal of increasing Altec capacity in order to help its customers achieve their targets of 25% recycled packaging content on average by the year 2025. This year, we were able to get closer to that goal via three main initiatives. First, the acquisition of two PET flake to pellet conversion lines from PolyQuest with a total capacity of 30,000 tons per year. Product from these lines will be sold as ARP PET as well as converted into SPT.

12:54 Second, the addition of single pellet technology, SPT for short, production capabilities at two of our North American Virgin PET facilities. Through this project, we can now combine virgin PET with 50,000 tons of ARPET into a single pellet, which at a rate of 25% recycled content would produce 120,000 tons of single pellet technology per year. Finally, ARPET and Poseidon Plastics received a grant from UK Research and Innovation to jointly develop an enhanced pet recycling facility in the UK based on Poseidon's technology. The site will have the ability to recycle 15,000 tons of pet waste back to pet feedstocks. Construction of the site is expected to conclude by 2022. We will continue to look for opportunities to expand our presence and capabilities in the recycled PET segment during 2021, still focusing not just on bottle-to-flake conversion, but teletype solutions which are necessary to make sure a PET bottle can get back to you repeatedly.

14:20 Turning to slide 13, and as we have discussed, Altec launched a company-wide project aimed at improving its ESG performance and is ranking among the top rating agencies. In addition to the advances made in 2020, a large component of our work was focused on properly showcasing the attributes of our products and the actions related to ESG that the company has taken in recent years. Through this approach, Altec was able to achieve the following. CDP's gradings regarding climate change and Water improved sharply throughout the year, bringing our climate change score above the North American average.

15:10 Sustainalytics risk ratings decreased from 39 to 30, thus improving our performance from the 39th to the 72nd percentile in the chemical segment. Overall score for S&P Global SAP also improved from 30 to 44, more than doubling our performance from the 31st to the 66th percentile. Moreover, as of January 2021, IPEC has joined the UN Global Compact, reinforcing its commitment to sustainability as a core element of its operations. While we are pleased with these results during 2021, we will be focusing our efforts on setting ambitious targets for each of the material issues identified in our ESG model so that our performance can be better measured and may continue improving in the years to come.

16:18 Looking forward to 2021, on slide 14, and as announced earlier today in our guidance press release, IPAC's outlook remains positive. We expect that the strong fundamentals behind last year's results will largely carry over into 2021. Let's touch on our guidance figures, which are based on the following key market and business assumptions. Average Brent crude oil reference price of $48 per barrel. Asian integrated pet reference margin of $245 per ton, which is in line with the closing figures for 2020, as well as last year's estimate.

17:05 An increase in polyester volume at stress quartage figures in 2021 would reflect the higher post-COVID demand patterns seen in the last two quarters. Significantly higher plastic and chemicals volume as additional EPA's capacity from the NOVA chemicals acquisition is incorporated. And a decline in North American polypropylene margins, which remained high in 2020, but should reflect the impact of recently added capacity in the market later last year. It is important to note our guidance does not consider any significant contribution to LDA from our new EPS facilities during 2021. As ALTEC must still improve operating conditions and capture synergies as it has done with previous acquisition, like with our EPS assets in South America and PEP assets in Brazil.

18:13 Based on these assumptions, over all comparable MDA excluding raw material carry forward for 2021 is expected at $561 million. Annual capex for the year is expected to remain low at $210 million, including an estimated $85 million for maintenance capex, while the rest will be used in the strategic projects mostly related to RPED. In terms of dividends, And as in previous years, our dividend proposal for 2021 will be announced at our upcoming shareholders meeting. And finally, from my financial standpoint, Altec has kicked off 2021 with a very solid position of 2.1 times net debt to FDA. We expect leverage to remain at similar levels throughout the year.

19:14 Thank you for your attention. At this point, I would like to open the call to your questions. Operator, please instruct the participants on how to place their questions. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Ben Isaacson with Scotiabank. You may proceed with your question.

20:02 Thank you very much, and good morning, everyone. Good to be on this call. I have three questions. I'll just ask them all at once. Your competitors are starting to invest in molecular recycling through methanolysis. I think the latest company is Eastman, and I know you guys are very big on mechanical recycling. So what's the trade-off there that we should be thinking about? What are the pros and cons? Why are you continuing to grow your mechanical recycling when others are looking at molecular? My second question is on your guidance. A lot of the street is skipping over 2020 and looking at growth versus 2019. And I think you guys had adjusted EBITDA of $789 million in 2019. And that's going down about 25% to $560. So when I look at the rest of the coverage universe of chemicals, there's an average growth rate of around 5%, 6%, 7%.

21:04 You guys are going down 20 plus percent. Ben, thank you for your questions. First,

21:32 You question about trade-offs between mechanical recycle and I guess methanolysis you mentioned. I think we should more properly call it chemical recycling perhaps. because it can be methanolysis, it can be glycolysis, or it can be hydrolysis. So there are different ways of chemical recycling. And I guess, I think there's a lot of effort being put by a lot of different companies to develop commercial operations of this chemical recycling. And well, let me just...

22:17 explain to you that what I mentioned about our agreement with Poseidon and what I called enhanced recycling is actually some sort of chemical recycling. So this project goes exactly in that direction. and in terms of so we are active and we've been talking to a lot of different technologies in this on this one and again we believe this particular technology Poseidon offers some advantages and that's why we are planning to invest with them in developing really a commercial operation you know in the next one two years and What are the advantages of chemical recycling versus mechanical recycling? I think the biggest advantage is that you can use less clean material or bottles, not as clean bottles, and still go back to feedstocks of PET and be able to separate and still use it. So I think that's the biggest advantage.

23:39 when you have very clean bottles, I think mechanical, I would say mechanical recycling works very well if you, availability of clean bottles is not there and you have, as I said, products of veins that contain a lot of different products, dust or whatever, then that's where the chemical Recycle To Provide An Advantage So I Hope This Answers Your Questions And In Terms Of Guidance Look I As I Went Through The Basic Assumptions Behind The Guidance I Have To Accept That Some Of These Assumptions Have Perhaps Been Overly conservative.

24:40 I mentioned as one very important component of our guidance the crude oil price at Brent at $48. As you see today, in the last weeks or so, Brent has been mostly over $60 per barrel. and you know very well that from previous experience that this is a very sensitive assumption for us. The higher the growth, I mean the higher the price of crude oil, normally the better our results are. And again, our guidance just to make sure is based on what I call comparable EVDA. and our guidance is not incorporating inventory games and carry forward raw materials.

25:46 Should this price of crude oil be maintained around the $60, $58, whatever, there is going to be a significant positive impact of both concepts, the inventory revaluation, So this might explain some of the differences that you perceive. But it's not only that. The advantage of high-eq goes beyond that. It also helps us improve our margins, at least on the ABBA per ton, because when you have higher prices of petrochemical products, imports of those products into our markets normally also will reflect a higher price. And as the import duty protection is in a percentage basis, that means that the effective duty protection with higher prices of petrochemicals is also higher. And that also helps our results.

26:50 So again, I think in our guidance, we have been overly conservative with this crude oil price. Remember? Remember that in four quarters, the average price of crude oil was $44. So again, the crude oil price increase has been higher than we all anticipated.

27:15 Sorry, just one question on that before you go on to Corpus Christi. I'm still very new to the story. Is there a very simple way of thinking about a sensitivity for a $10 change in oil? What is the impact on EBITDA or I know there's a lot of moving parts and it's very complicated, but is there a way we can just get a sense of the magnitude of what the impact is to EBITDA for a $5 or $10 change to oil?

27:43 Okay, well, I think we can work on that. As you mentioned, there's a lot of moving parts, but I think we can certainly work on that and give you an idea. Sometimes it's not crude oil by itself, but it's the impact crude oil has on the different products, on our raw materials and the products we sell. We can certainly work on that and separating what is inventory revaluation from the other aspects. Let me still remain with the guidance. On the crude oil price, we have this assumption. Only important assumption is the margins of PTPTA in Asia, particularly, as you know, in our markets, our sales in Brazil and Argentina and some other export markets are normally referenced to that margin.

28:44 The assumption that we took for 2021 is $245 per tonne. Doing the first two months of this year. I would say the margins in Asia have others Perhaps $25 higher than what we were assuming okay, so that will also have a potential of Improving our result if it remains where it has been and of the last, as I mentioned, couple of months. And then another very important assumption, and perhaps this is different versus other chemical companies if you wish, is the fact that We are assuming also, and in fact, and in fact, our every BA guidance without the impact in polypropylene margins that we are assuming in the guidance, our every BA guidance will be higher than $600 million. So we are assuming that this year we're going to experience an important decline in polypropylene margins as a result of a new plant is starting up at the end of last year.

30:19 I have to say that this reduction in margins has not yet materialized. Okay, so here again, we might have been somewhat conservative on that. And so in general, I would feel that our results, at least for the first quarter, second quarter this year, will probably be significantly higher than guidance. And at this point, the biggest concern I would share with you is one of our raw materials has surged or spiked in a significant way, and I'm referring to propylene. Propylene prices were 38 cents in November, move up to 48 cents in December, move up to 60 cents in January.

31:16 And I don't know, we estimate that in February prices might go all the way up to close to 80 cents per pound. We have seen spot prices, you know, higher than 90 cents per pound in the last days. So again, and that's part of the difficulty of the equation of crude oil, why higher prices normally help over results, when you experience such a high increase, it might have some impact. If these prices remain for a certain period of time, this might hurt volume of the derivative products, in this case polypropylene.

32:05 Some of our customers will look for alternative products with these high prices of the polypropylene propylene. So that's perhaps, as I say, one of the concerns I would have. But on the other, again, I don't think these prices would remain for a long time. But if they were to remain at those levels for longer, that could be sort of a problem. But in the most other points I mentioned, I think, I think we are being very conservative in the assumptions. Okay, so that will probably answer your question regarding the guidance.

32:54 And in terms of Corpus Christi, Corpus Christi last year we published We are now undertaking, we are now going back to remember I mentioned to you that we're looking for ways of improving or reducing the investment cost of the project. So we have undertaken all of those efforts. And we do believe that we will have a reviewed investment budget by the end of this year. And at that time, we should be ready to start construction.

33:39 And those are the, let's say, That's the status of the project today. And this means that during 2021, we don't expect a lot of CAPEX related to the Corpus Christi project. The CAPEX should come back in 2022, 2023.

34:00 Thank you for your detailed response. Our next question comes from the line of Ricardo Resende with JP Morgan. You may proceed with your question.

34:19 Hi. Thanks, Pepe. Thanks, José Carlos and Alejandro. A couple questions on my side. So following up with what I just discussed on polypropylene and the margins we're continuing to see late last year and the beginning of this year, even with the new plants coming online late last year, How should we think about the results on the plastic and chemicals segment throughout the year? As we are seeing volumes probably recovering through the year, but then margins potentially declining according to your guidance. And then my second question is on the recycled PET data that you started to give a little bit more disclosure, and thanks so much for that. It's very helpful.

35:06 When you think about the CAPEX, for 2021, how much of that capex is coming from some of the initiatives that you're disclosing now and how relevant those RPT measures should become within your capex? Thank you.

35:26 Okay, well, as you mentioned, Ricardo, I think we are assuming, again, in our guidance that PEP marches will gradually a big boost throughout the year, and certainly we expect that the way we see it today at least, because probably first half it will remain high, similar to last year, and perhaps in the second half is where we expect we could see some decrease. That's more or less the assumption we have today. And for the time being, availability of polypropylene in spite of the new plant remains very limited.

36:11 Inventories are very low as a result of all the shutdowns at the end of last year due to hurricanes. And now also PPE is relatively tight is supplied as a result also of the high prices of propylene and also of the availability of propylene. So for that reason, we do believe in the first half we should have better margins than we anticipated in our guidance and still consider, and we hope we are wrong, that there will be a decline in the second half of the year. again, we hope we're being too conservative.

36:57 Now, with respect to our art of Catholics, in no way in no way guidance. I think I would say, when you can see the when you subtract from the total Catholics that we estimate 210 something you, you reduce the the 80 something $85 million estimate for maintenance this year. I think I could say that half of that figure would be for ARPE investment.

37:35 Okay, very clear. Thank you so much. Our next question comes from the line of Luis Carvalho with UBS. You may proceed with your question.

37:48 Thanks, everyone. I have basically two questions. The first one is kind of a common question from my end in terms of capital allocation. So I would like to hear from you guys a bit more color after the recent, you know, non-volcanic acquisition. How should we look at capital allocation in terms of, I don't know, the leverage that you're, you know, now that you're net debt to the guys close to two times or, you know, dividends and potential, I don't know, further acquisitions looking forward, right? The second question, I think you pretty much already explored that you have been a bit more conservative on your guidance.

38:33 And the thing that you already mentioned, I mean, when we look to volumes and net sales, they're basically growing, I don't know, 6% to 7% on a year-over-year basis. Why maybe not? without the venture impact is dropping something close to 7%, right? So just would like to understand what your outlooks in terms of the overall margins, despite of the guidance that you gave in terms of the 245, but how you're seeing, I don't know, supply demand and how that can be, I don't know, competitive within this environment.

39:11 Thank you.

39:16 Okay.

39:18 Well, with regard to capital allocation going forward, I would say that recycled project or recycled pet recycling is going to be an important part of our future investment. And I would say also that the other important project will be a Corpus Christi. And we do estimate that over the next years, a figure of about $200 million would be in the ballpark, $200 million per year going forward. That's what we would estimate for traffic over the next couple of years. Sorry, how much? $200. Do you say $200?

40:05 Yes. Now, with respect to volume and I mentioned we've been conservative in the guidance, and we do expect that margins in PED in 2021 are going to be slightly better than in 2020 overall. And we also assume that volume is going to remain strong, particularly again during the first, at least during the first half of the year.

40:51 And with relationship to NOVA, to the NOVA acquisition, I mentioned during my presentation that we did not estimate a significant ADA this first year. And this is in line with our about evaluation. The only thing I can tell you that in our model, in our evaluation model for NOVA, we do estimate that at some point in time, not necessarily in 2022, but we should be able to capture around $20 million of LDA from the NOVA, from the asset that we acquired from NOVA.

41:41 Okay, thank you. Our next question comes from the line of Nicolash Lipman with Morgan Stanley. You may proceed with your question.

41:53 Thank you very much. Thanks for the call and for taking my questions. First, a question related to ESG and RPET. So you're moving towards 25% RPET over the next five years along with your clients. Coke is offering some products with 100% RPT, some with zero, some with a mix. How are you thinking about that from a capacity perspective? Are you thinking of setting up plans that can do 100% RPT in some places or will you continue to have consolidated places where you're mixing the products? So that's question number one. Question number two is how should we think about your PTA capacity over this period as you're moving towards RPET.

42:45 Is it fair to assume that you would continue to buy additional PET capacity in order to maximize your PTA capacity? Or am I thinking about this the wrong way? Finally, a very small question. Are you factoring in anything in terms of Caprolactam for your guidance? Thank you very much.

43:07 Look,

43:11 In terms of your first question, which was how do we see ARP versus SPT, you know, it really, we think both products are going to be necessary. And it really does depend. We are, in terms of our capacity, it really does depend on the needs of our customers. and if you want to produce a hundred percent ARTEC bottle the only way you can do that is with ARTEC okay you cannot do that with SPT you need ARTEC for that but if you need only 25 percent in you know in some of your other product, then that can be done with SPT, or even if you know 40, 50, whatever, that can be done with SPT and adding some RPE. But again, it's very much where we are approaching our growth plans. We have a discussion with all of our customers, one by one, and try to understand exactly what the plans are and what they need, and based on that, we are proceeding to make our investment.

44:34 And remember, and this is something that is important, we are certainly not the only producer of ARPED in the regions where we have presence. In some cases, some of our customers, they have their own ARPED capacity, and there are other third parties that also have ARPED capacity. So that's why coordination with our customers is key so that we can really supply to them exactly what they need. But if you were to ask me, as I said, I think we're going to be perhaps 50-50 IPED versus SPT. And also I want to mention SPT Offerings can only be made by companies or companies that have a virgin PET facility.

45:32 So third parties are going to have a hard time going through the SPT route. And the SPT, again, it gives our customers some advantage, flexibility. I mean, they can use this product. without having to mix with another product, which simplifies the production and the efficiencies in some cases. So in terms of PTA and PET balance, I think we are right now actually short of PTA.

46:17 We are short of PTA. We are buying PTA from third parties. As we go ahead with Corpus Christi, the situation will be more balanced. With the acquisition in Wilton, we have this balance already. And we are not at this time necessarily looking for additional PET acquisitions. We do have, as you mentioned, some PET debottlenecking, but that debottlenecking also will compensate for the introduction of SPT. As we produce SPT in some of our lines, the capacity to produce bilge goes down accordingly. So with this debottlenecking, we will be able to produce this additional SPT without reducing our PET, virgin PET capability and our PTA consumption.

47:22 So at this point, we think we're gonna be quite balanced over the next years. In terms of Caprolactam, we are not assuming any DA in the guidance. a main reason for that, margins in Asia, although they have been improving in the last months, is still very low. So over a couple of lifetime, it's not generating any ADBA, or at least we're assuming it will not have a positive ADBA in the guidance.

48:02 Thank you. Our next question comes from the line of Vanessa Kiroga with Credit Suisse. You may proceed with your question.

48:15 Hello to the LPEC team. Thanks for taking my questions. Sorry. The first one is about your expectation for polypropylene credits. Pepe, you mentioned that you expect the first half to be better than the second half in terms of the spreads for polypropylene, but do you have a specific spread or margin implied in your guidance for 2021? And the other question would be about the NOVA chemical operations. When would you expect them to become EBITDA positive for Alpek? Thank you.

49:04 Let me ask your second question first. As I mentioned, we are assuming no EVBA from NOVA this year. And as I also mentioned, we estimate once all the changes are made and some investments made there, we estimate this, our target at least, is to get it to $20 million per year. And that will probably be a few years from now. And in the meantime, I think we will be making progress proportionally in this timeframe. So we should have some positive impact, 22, 23, and probably 24, 25, we should be, our aim is to be at this $20 million every day per year. So that is the NOVA-related question. Okay, now, in terms of, you were asking TP margins, Vanessa.

49:59 I think if you take the average of the year, I think our margin is around 16.5 cents overall, I mean, for the 12 months. And right now, we are running significantly higher than that. We are running more like 19 cents, 19 to 20 cents. So again, which is higher than what we have anticipated in the wage guidance for these months in Yes, so so again, we think we're doing a little bit better but again, I want to repeat the fact that we have same concern with this search in prices of propylene. If this price search continues then that could put pressure in the margins as well.

50:54 Thank you very much for the details. Our next question comes from the line of Leonardo Marcondes with Itaú BBA. You may proceed with your question.

51:09 Good morning, everyone. Thank you for picking my question. I have only one question regarding your stretching ring. So a few calls ago, you guys mentioned that you will implement some cost-cutting initiatives. that could save up, if I'm not wrong, around $100 million, right? So I would like to know if you guys could share with us more information on that. I mean, which division it would impact, if this is more SG&A or production-related costs, and when you guys expect this initiative to take place. Thank you. Okay, look, I do believe that these cost savings should be materialized within the next, I would say, three years.

52:07 And some savings come just from, well, I would say digitalization on the one hand, operation excellence on the other, particularly in reducing maintenance costs. We also have significant opportunities in logistics, reduction of energy as well, some asset footprint opportunities, and again, it's going to be, and in some cases also importantly, with technology enhancement in some of our plants. which means adopting new technologies.

52:53 So altogether, I think we could be hopefully close to $100 million and timeframe, I would say three years. I mean, it will be gradual, but in three years we should have most of this cost savings in our hands. Just a follow up for my end here. So just to know if I get it clear.

53:23 So initiatives on this front should start over the next three years or after three years.

53:32 And then on the third year, you would have this $100 million Well, that's right. The idea is it will be gradual, and hopefully in three years we will be able to capture all these savings. We have already identified an opportunity to reduce $50 million. but we are working in some other opportunities. Yeah, but it's going to be gradual and perhaps most of the savings coming around the second or third year.

54:22 Perfect. Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. With no questions in the queue, I'd like to turn this conference back over to Mr. Elizondo for any additional or closing remarks.

54:52 Thank you, Laura. I would just like to thank everyone for participating in today's webcast. Ladies and gentlemen, that does conclude today's webcast. Thank you all for joining us today. You may disconnect at this time.