Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2022-Q1

[Alejandro Elizondo, executive]

Hello, and welcome to Alpek's First Quarter 2022 Earnings Webcast. I am Alejandro Elizondo, Alpek's IRO. And today, I have the pleasure of being joined by our CEO, Pepe Valdez; and our CFO, Jose Carlos Pons. This presentation is divided into 2 parts. First, Mr. Valdez and Mr. Pons will comment on Alpek's first quarter performance, relevant events and updated guidance figures. 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 certain risks and uncertainty. Actual results may differ materially, and the company cautions the market not to rely unduly on these forward-looking statements. Alpek 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 today's webcast is being recorded and will be available on our website at alpek.com.

I will now turn the call over to Mr. Pepe Valdez.

[Jose de Jesus Valdez Simancas, executive]

Thank you, Alejandro. Good morning, everyone, and thank you for joining us today. This morning, I am very pleased to start by saying that Alpek has kicked off 2022 on an extraordinarily strong note. Margins were more robust than expected across all the key products in our portfolio. This supported the company in achieving record quarterly highs for both comparable and reported EBITDA.

Let's start by reviewing the main topics we will cover in today's webcast. First, Alpek significantly exceeded financial performance expectations for the first quarter. José Carlos will review this in greater detail in his presentation. Second, we will discuss the progress related to the Octal acquisition. Third, we will cover Alpek's recent efforts to improve its governance practices. And finally, we will provide revised 2022 guidance per the earnings report released yesterday.

Providing some context for the first quarter result, the global economy remains strong as tightness increased in the marine freight industry due to the Russia-Ukraine conflict, resulting in higher cost and lower availability for vessels needed to balance worldwide supply chains. In this environment, Asian integrated polyester reference margins averaged $420 per ton for the quarter, much higher than expected and only 3% lower than the previous quarter, with the spread between Chinese and Asian margins widening to $98 per ton.

North American polypropylene reference margins also experienced a lower than expected quarterly decline, averaging $0.38 per pound, 20% lower quarter-on-quarter, but only $0.05 per pound lower than the corresponding figure for December. In North America, EPS margin continued to reflect the strength they gained in the fourth quarter of 2021, declining by $0.07 per pound in the first quarter, but remaining at higher than historical levels.

At this point, I would like to turn the call over to José Carlos, who will go into more detail regarding the impact of these changes on financial results.

[José Pons, executive]

Thanks, Pepe, and thank you all for being here with us today. I would first like to highlight some of Alpek's main achievements during the first quarter. Our overall volume increased to 1.2 million tons, on track with guidance. We achieved record quarterly comparable EBITDA of $333 million, with both the Polyester and Plastics & Chemicals segments posting their highest figures ever for any quarter.

We gave a dividend to shareholders of $176 million, representing a 6.5% dividend yield at the time of payment. And leverage was further reduced to 1.0x.

If we start by taking a different look at volume, Alpek reached 1.22 million tons this period, 4% higher than last quarter as demand for all of our products remained strong. In the Polyester segment, volume was 3% higher quarter-on-quarter, largely due to strong demand and efficient operation across all of our sites and a lack of weather-related events, which affected us in 2021. In Plastics & Chemicals, volume was 6% higher quarter-on-quarter as polypropylene demand remained strong and Alpek was able to operate idle EPS reactors throughout the scheduled maintenance at our U.S.-based facilities.

Moving on to raw material price dynamics. Average spot Brent crude oil price increased to $97 per barrel, 23% higher than in the previous quarter, largely due to the effects of the Russia-Ukraine conflict. U.S. reference paraxylene prices increased by 21%, largely in line with the rise in crude oil. And in the Plastics & Chemicals, propylene prices remained stable, averaging $0.63 per pound, a 4% decrease when compared to the previous quarter.

Switching over to EBITDA breakdown for the first quarter, we can see that comparable EBITDA was a record of $333 million and 11% higher quarter-on-quarter. This was primarily due to better-than-expected margins for our main products as well as higher volume across both segments. Reported EBITDA was $456 million, 70% higher quarter-on-quarter. This result also included a noncash inventory gain of $63 million and a positive carry forward effect of $66 million.

In terms of results by key segments, we can see that Polyester comparable EBITDA was $193 million, 21% higher quarter-on-quarter and 116% higher year-on-year, making this the strongest quarter ever for the segment. Results largely benefited from the entry of 2021 contracts as well as a strong Asian polyester reference margins, which remained higher than expected, averaging $420 per ton.

In Plastics & Chemicals, comparable EBITDA also set a new quarterly record of $142 million, an increase of 3% quarter-on-quarter and 46% year-on-year. This was mainly due to solid EPS margins stemming from a strong demand, coupled with the higher import parity prices due to increased marine freight costs, as well as polypropylene margins, which remained higher than expected for this point of the year.

With regards to free cash flow generation in the quarter, net working capital investment increased by $193 million, largely due to rising raw material prices during the quarter. CapEx totaled $40 million and was mainly used for maintenance and minor asset replacements.

Alpek paid a $176 million shareholder dividend as approved during its Annual Shareholders' Meeting in March. Free cash flow resulted in $120 million as record EBITDA more than offset the increase in net working capital in the quarter.

Finally, I want to discuss the company's financial position during the first quarter. Alpek's net debt increased to $1.31 billion. Last 12 months EBITDA also increased to $1.28 billion, resulting in an improved leverage ratio of 1.2x net debt to EBITDA. If considering net debt to comparable EBITDA, we also see that Alpek also improved this ratio to 1.2x.

That concludes my comments. I will now turn the call back to Pepe.

[Jose de Jesus Valdez Simancas, executive]

Thank you, José Carlos. Turning our attention to recent events. Per our announcement earlier this year, Alpek reached an agreement to acquire Octal, a major PET sheet producer. The process has continued moving forward as planned, having already received the majority of necessary approvals from regulatory authorities. This transaction continues to be expected to close by the end of the second quarter of this year.

Upon closing, Alpek estimates an accretive EBITDA effect of $85 million during the second half of '22, which is not included in the guidance figures.

As we stated in the past, Alpek strives to maintain world-class governance practices. To this point, the company implemented a series of initiatives during its latest Annual Shareholders' Meeting, which included increased disclosure on its proposals to shareholders such as financial reporting, board composition and fees as well as dividends. And the addition of a new member to Alpek's Board, we should have increased the share of both independent and female members.

On April 18, we were deeply saddened by the passing of Francisco Garza Egloff, a member of Alpek's Board of Directors. We are grateful to him for his valuable contributions to the company. Our thoughts and prayers are with his family and loved ones. As of now, Alpek has no plan to replace his Board seat.

Finally, regarding our outlook for the remainder of 2022 and based on the stronger than expected margin so far this year for the key products in our portfolio, Alpek has decided to revise its guidance upwards.

Our new guidance figures are based on the following key market and business assumptions: average Brent crude oil reference price of $100 per barrel; Asian integrated PET reference margin of $355 per ton based on higher demand and freight cost, combined with the normalization in the Asia versus North America spread mentioned last quarter; as well as a lower decline for North America polypropylene margins, though still expected to close 2022 at original guidance levels. Overall, volume and CapEx remain unchanged as both are currently on track with original guidance.

Based on these assumptions, guidance for overall comparable EBITDA for 2022 is now set at $1.25 billion.

As always, I would like to thank our team, customers and suppliers for helping Alpek reach new heights. I would also like to thank you for your attention today.

I will now turn the call back to Alejandro to open the webcast for Q&A.

[Alejandro Elizondo, executive]

Thank you, Pepe. [Operator Instructions] We will attempt to cover as many questions as time allows.

Our first question comes from Alejandro Obregon with Morgan Stanley.

[Alejandra Obregon, analyst]

Congratulations on the amazing numbers. The first one I think has to do with supply-demand dynamics. So you have talked about this very tight environment in PET and I guess some of your peers have also spoken about this. So I was hoping to hear more on that. You're very close to capacity in PET. The Americas is a deficit market. And apparently, global markets are actually very tight as well.

So I was just wondering if this is a point where we should be worrying about availability. Could this be an issue going forward, especially as we face seasonally stronger quarters ahead of us? And could this be a reason for you to change the way you're thinking of Corpus Christi? That's the first question. I'll stop here and then ask the second one.

[Jose de Jesus Valdez Simancas, executive]

Well, Alejandra -- well, I think you're right. The demand for PET has actually been higher than our estimates, not only for this year, but I would say for the last 3 years. And it has compounded. So yes, the supply balance dynamic in -- particularly in the U.S., is tighter than normal.

But I do believe that the capacity is in place in North America to supply the demand within the next months. And of course, there will continue to be imports into North America. So I do not believe the issues of availability. I think the market will be well supplied. But certainly, I would hope that this relatively high utilization rate will help, of course, maintain margins at a profitable level. This is the answer to your question.

Again, we do expect, as I did mention, that by the end of this second quarter the Octal product -- I mean, the Octal project will be authorized. We are working very hard to make that actually end of May. So if we can accomplish that, that would also give us more flexibility to increase imports of PET into North America. So that would also help address this problem of availability. So yes, the situation is -- I mean, operation rate is high, but we do not foresee a problem of shortages or problems of availability. And...

[Alejandra Obregon, analyst]

Understood. That was very clear. And then a second question, if I may, having to do with the contract-based part of your business. I was just hoping to understand these type of contracts, especially whether they have an energy and a transportation component baked into them. And when throughout a typical year, can we expect to see all that portion of the contract base rolled over in any given year? How does that work? Anything that can help us understand that will be very helpful.

[Jose de Jesus Valdez Simancas, executive]

Well, normally, we sign, I'd say, 1-year contracts with our customers in North America or with most of our customers in North America. And typically, these contracts are raw materials plus. So it's cost plus. So I -- that probably answers one of your questions. Yes, to the extent that these contracts are raw material plus, then they will take into account some of the increases in energy. That's on the one hand.

And also, in some cases, we even do contracts for more than a year, 2 years, perhaps 3 years at the most. So that also sort of happens. And as I said, these contracts are typically agreed at the end of the year, in the last quarter of the year. So like for the U.S., we already have contracts with most of our customers for 2022. And we will revise these contracts in the last quarter of this year. So that's more or less the way this works. So at least on a year perspective, that gives us in our largest market, which is the U.S., a certain stability. Okay?

And in South America, for example, the situation is different. In South America, our contracts normally based more on Asia prices plus. Okay? So that's a different dynamic. By definition, they are not as stable as in the U.S., but they are certainly -- at least in terms of the volume, we know how much we can sell there. Margin can change depending on what changes in Asia, but volume-wise they're very predictable.

I think you mentioned also, Alejandra, Corpus Christi. And perhaps -- and I'm sure this question will come up again. But let me tell you where we are in this moment. And perhaps, as early as tomorrow -- we are reviewing the status of the project. Significant progress has been made. And we do have a very clear definition of the investment cost going forward. And I would say that most likely a decision will be taken during next month, May -- let's say, May probably, to sanction the project if all of the shareholders are in agreement.

From the perspective of market, as I mentioned, it's a positive situation. And the cost, as I said, we believe we have more confidence in our estimate than months before. We believe we have a FEL-3, which gives us a plus/minus 10% degree of change. So we have the information ready for making the decision. And as I said, I think we will announce what the final decision is within the next month and a half at the most.

[Alejandra Obregon, analyst]

And congratulations again.

[Alejandro Elizondo, executive]

Thank you, Alejandra. Our next question comes from the line of Tasso Vasconcellos with UBS.

[Tasso Vasconcellos, analyst]

Congrats on the quarter results. My first question is maybe a follow-up on the margins for both Polyester and PC segments. Margins are clearly remaining at very, very healthy levels, although some normalizations are expected looking ahead. Could you break down a little the major upside and downside risks you view from both supply point of view and the demand point of view? We have seen demand remaining very, very healthy. So we believe risks here are more on the supply side. But it would be great to hear additional thoughts from you on that?

My second question. You mentioned that demand remained strong despite the situation in Eastern Europe during the quarter. Could you also comment where Alpek was most impacted by the conflict? What did you feel so far as a consequence of the war other than in pricing? And what might be the major implications for the company afterwards? Those would be my 2 questions.

[Jose de Jesus Valdez Simancas, executive]

Okay. As you mentioned, on the demand side -- demand and supply you did mention. Well, demand, as I said before, we continue to believe that demand is going to be very stable for the rest of the year. We don't see major issues with demand. And again, margins, at least in respect to the U.S. market also, I would say stable for the reasons I just mentioned before.

I did forget to mention during my presentation a very important event that are significant for the -- at least for the next 5 years, and that is the fact that on March this year the FTC decided to extend for 5 more years the antidumping duties against China, India, Oman and Canada in PET. So that's an important development, since at least for the next 5 years will give us that certainty.

So that, again, on the margin, that should represent an upside. On the volume, as I said, we see things stable. We don't see any threat of a significant reduction in volumes. In both, in Plastics and in Polyester, on the supply side -- the supply side is where things would change. Polypropylene, at the last quarter this year, there's a startup of a new plant in Canada. And so that could be a -- let's say, a -- or represent a downside, if you want to look at that way. Also again, once the plant starts, it certainly takes some time to get a normal operation.

And on the supply side in the short term on polypropylene, well, there are 2 plants in the U.S. on force majeure and a third plant that is having some mechanical issues. So we believe that perhaps for the rest of May, those plants will not be operating or at least not fully at full capacity. So that in a way give us, again, confidence that margins could continue to remain healthy for a longer period of time.

And in terms of the implications, I mean, of the Russia-Ukraine war, I mean, other than, of course, the humanitarian consequences of that, which we very much regret -- in our business, the main impact has been through higher energy prices, crude oil and natural gas prices. Those have been the main impact that we've seen. The higher crude oil prices does not really impact our margins. In fact, sometimes, as we have explained to you, it does help our margins. But it does have an impact in our cash flow, because it does increase our investment in working capital as prices are higher, our receivables are higher. So it does have implication on the cash flow of the company.

During this first quarter, a significant part of our EBITDA went to finance the increase in working capital. So part of that has to do with this higher crude oil prices. And of course, it does impact our natural gas prices as well. But we -- again, we believe that the impact to natural gas prices in the U.S. -- I mean, not globally, of course. Globally, it has had a big impact. But in the U.S., the impact -- or the reason we have seen increase in energy prices is more -- has more to do with weather-related factors and with prices of coal.

Prices of coal are very high. So that makes natural gas able to replace coal, increase the demand. And the higher -- or the colder weather, particularly during the month of April, has also had a significant impact on prices.

Again, I think in natural gas, it's more that than the war in Ukraine. And the reason for that is the LNG facilities in the U.S. are working already at full capacity. So there has not been a significant increase in LNG due to the war. It has increased the volume, but it had already been planned that way.

So that's -- those would be, I'd say, the consequences of the Russia-Ukraine. We do have an operation in the U.K., as you know. And the increase in natural gas and power prices in that particular plant are more significant. But we have -- we are relatively hedged to those price increases with the contracts that we have.

[Alejandro Elizondo, executive]

Thank you, Tasso. Our next question comes from Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

My question is regarding your assumptions for the new guidance. What are you assuming for the Asian spread of PET and for the North America spread for polypropylene in this guidance, not for the average of the year, but for the end of the year, if possible? And also, how much is impacting freight costs in import parity [indiscernible]?

[Jose de Jesus Valdez Simancas, executive]

Okay. Well, those are key questions, Vanessa. I would say -- I think I did mention during my presentation that in terms of PET, I think we're assuming Asian margins of 4 -- I'm sorry, $350 as opposed to $315 in the original guidance. In terms of polypropylene, actually, we are assuming that polypropylene margins end up the year as in the original guidance, which is I believe that they're going to -- and again, reasons that I mentioned has to do with the start of the new facility, the new plant in North America. And so in those 2 segments -- I mean, those are -- we do assume that they're going to go gradually down.

In terms of ocean freight, that's the most difficult variable for us to forecast, to be honest. What we are saying is that at least for this quarter, second quarter, the freights are going to remain pretty much where they are today. And during the second half of the year, we assume that the cost per container is going to go down to somewhere between $6,000 and $7,000 per container, I'm sorry, versus the $9,000 to $10,000 that we have today. So we do assume that freight is going to -- freight rates are going to go down in the second half.

And so those will be the key assumptions. In very simple terms, you could say, well, we -- that the guidance today is based on the fact that second quarter remains relatively strong, similar to first quarter, might even be a bit higher. And the second half goes back very close to the original guidance. So again, if situation were to remain as they are, we might have an upside in the guidance EBITDA. But we will discuss when the time comes.

[Vanessa Quiroga, analyst]

Pepe, in dollars per ton, how much is the freight?

[Jose de Jesus Valdez Simancas, executive]

In dollars per ton, we are talking of -- depending of East Coast, West Coast. But you're talking around somewhere between $300 and $400 per ton.

[Alejandro Elizondo, executive]

Thank you, Vanessa. Our next question comes from Andres Cardona with Citi.

[Andres Cardona, analyst]

I have 2 questions. Maybe staying with the previous question, I would like to understand what is your view of the market dynamics that are driving a kind of a reliability premium for the domestic production in the Americas? How sustainable do you think it could be over the mid- to long term? And the second one is, very strong cash flow, outlook remains very positive, leverage remains low despite the Octal acquisition. So how are you thinking about capital allocation nowadays, if you are still looking for M&A opportunities? And how can you like prioritize it versus extraordinary dividends? If you can share your thoughts about these 2 points.

[Jose de Jesus Valdez Simancas, executive]

Let me perhaps start with the second question. For the time being, as you know -- we have the investment of the Octal facility, and that we're going to have to pay within the next couple of months. So that will significantly increase our debt short term. Of course, we have secured debts contracts, which are very attractive, at very attractive rates. And we are ready to do that.

The second step, Andres, would be the decision on whether to continue or not with Corpus Christi, which I would say is high probability that we will. So that also represents a commitment, a CapEx commitment for the next 2, 2.5 years. We will also have to take that into consideration. So in terms of what I would say very likely investments, those 2 are clear.

And the other question: will we continue to look for M&A? Well, of course, we will continue to look for M&A opportunities. And again, decision on whether to pay additional dividends or not are going to be based on the cash flow that we see during the rest of the year. But nothing has yet been decided other than the fact that we are ready to go ahead with Corpus Christi and we are ready to go ahead with Octal.

And then your first question, you mentioned reliability premium. I don't -- well, I do believe that that's a good question. I think during this last couple of years, I think a lot of our customers, domestic customers, in particular, I think they have become more appreciative of the advantages of having a domestic supplier, not only in terms of the cost -- of the freight cost, but also in terms of the delivery schedule, of the certainty of delivery, reliability of the shipments. So yes, I think that going forward, I think the customers are -- domestic customers are going to be more willing to accept a higher premium relative to imports. I'm convinced that that's going to happen. And -- but difficult to put a number on that right now.

[Alejandro Elizondo, executive]

Thank you, Andres. Our next question comes from the line of Jean Baptiste Bruny with BBVA.

[Jean Baptiste Bruny, analyst]

Just a couple of questions on Octal actually. Can you be a bit more specific on the authorization you already received and the ones which are still pending? And in the last call, you mentioned that you expected an impact on EBITDA after consolidation of about $80 million from the consolidation of Octal. Is the number still the same at current stage? Or are you a bit more optimistic or pessimistic?

[Jose de Jesus Valdez Simancas, executive]

All right. Well, in terms of Octal, I actually -- I believe we have very good news. We have obtained the most important regulatory authorizations. The project has been approved by pretty much every country where we had to request a permit, including U.S.A., including Saudi Arabia, Brazil...

[José Pons, executive]

Turkey.

[Jose de Jesus Valdez Simancas, executive]

Turkey. I think pretty much every country has approved the -- or authorized us to go ahead with the project. So the only exception being Ukraine for reasons that I'm sure you can understand. So Ukraine was originally part of the agreement. We have a waiver to go ahead and close the transaction without authorization from Ukraine. So I would say from the regulatory perspective, we are all clear to close the transaction.

What is pending right now is only the final agreements mostly between Octal and their banks to be ready for closing. And that's what I said: we should, if things go as expected, be able to close sometime in May, actually, the transaction. We are very optimistic. The last authorizations we receive over this -- last week, Friday from the U.S. and some day from Saudi Arabia. So there's actually no more conditions to be met. It's just the paperwork to close all the deal.

In my presentation, I mentioned that we expect -- assuming that we close -- assuming that we close in June, we would expect an incremental EBITDA, not considering the guidance of $85 million. Again, this is aligned with sort of the assumptions behind the -- behind our guidance that second half is going to be very much in line with budget or with the guidance.

Should the margins continue as they are today, yes, there is a significant upside on the EBITDA that we could get from Octal, and even more if we can close the transaction end of May. We will have an additional month. So yes, I think there is an upside. And again, we are doing everything we can to close the transaction by the end of next month.

[Alejandro Elizondo, executive]

Thank you for your question, Jean. We will now move on to written questions. Our first question comes from Ben Isaacson with Scotiabank. Pepe, Ben asks, what is your aspiration between contracted versus spot PET volume? Why not move to 100% contracted and improve your multiple by reducing variability and investor uncertainty?

[Jose de Jesus Valdez Simancas, executive]

A significant portion -- Ben, a significant portion of our contracts is on a -- I mean, is on a cost-plus basis, pretty much everything in North America, Mexico as well. The only, as you say, spot prices that we have is South America: Brazil and Argentina. Those are the biggest PET sales that are not strictly under sort of a cost plus or fixed price.

And yes, as you mentioned, it's a matter of -- yes, we could increase the certainty of -- or the stability of our cash flow. But again, remember -- just imagine what would have happened to us if those prices had been fixed a year or 2 years ago. We would have lost a lot of upside. So it's a matter of, again, negotiating with the customers what they want, and they just want to be more related to the prices in Asia.

Again, in the last couple of years, that has been a very big advantage for us, because the impact of the freight rates and the margins in Asia we've been able to capture. If we had been on a cost-plus basis, the margins would have been significantly lower.

So there is -- I understand your point. We would like to have everything stable. But perhaps, if you are suggesting what we should do is to fix those contracts at times like this when the freight is high and the -- freight is high and the margins are high. But you can imagine our customers are quite tough. But yes, the -- I mean, the issue of trying to have more predictability, more stability is something that we will continue to work, and then, as you say, we'll try to increase our multiple based on that.

[Alejandro Elizondo, executive]

Our next question comes from Sofia Martin with GBM. Sofia asks, given the higher than expected results and revised guidance, can we expect an extraordinary dividend?

[Jose de Jesus Valdez Simancas, executive]

Sofia, I think -- again, as I mentioned, that is going to depend on our cash flow generation from now on and also the -- I would say, Octal is pretty much a done deal from our perspective. And also on the decision to move ahead with Corpus. But -- I mean, if the results continue to be strong, like guidance or a little better than guidance, which is a possibility, to be honest, then I would say yes. I think it's a good chance that the Board will decide to increase the dividends, always, of course, watching the leverage of the company, I mean, without going to something that would reduce our financial stability. That's a possibility.

[Alejandro Elizondo, executive]

Thank you, Pepe. Maybe following that thread of conversation, our next question is also from Ben Isaacson, who asked for a pro forma leverage post Octal acquisition.

[Jose de Jesus Valdez Simancas, executive]

I would say with Octal, only -- I think it will be like 1.5, around 1.5.

[José Pons, executive]

1.5, 1.6, yes.

[Jose de Jesus Valdez Simancas, executive]

But Ben, our goal, as we have explained to you many times, would be to get closer to 2, so 2x. So that's something that we -- we have some flexibility there. And hopefully, we will continue to reduce our debt very quickly. I mean, when people say: Yes, what happens when your margins normalize?" Well, I don't know, margins normalize, also the investment in working capital is going to come down most likely. And that will free a lot of cash flow.

I think our investment in working capital over the last 2 years has been more than $400 million, $500 million. So yes, we do have -- yes -- so you say, "Well, margins normalize, EBITDA goes a little bit down." Yes, but then the working capital most likely would also come down. But those are -- that's the range, Ben, that we are considering, trying to stay below 2x even in the worst case.

[Alejandro Elizondo, executive]

Thank you, Pepe. Our next question is also from Ben, who asks what debottlenecking opportunities are there to permanently increase both Polyester or Plastics & Chemicals production volumes? What is the timing and CapEx behind those?

[Jose de Jesus Valdez Simancas, executive]

We are already in process with some debottleneckings of some of our plants, but not major debottleneckings. It's more debottlenecking in our Brazilian PTA plant. We have that under consideration. And the small debottlenecking in our Pearl River facility also is underway. And for the time being, those are the main projects. But -- we have a very small debottlenecking in EPS in the U.S. Eventually, we do believe that we're going to pursue a project in Altamira to debottleneck PTA a little bit. But more than debottlenecking, I think the objective is to improve the cost, to reduce cost, reduce cost and improve our -- or reduce our carbon emissions. So we do have some opportunities in all of those areas.

[Alejandro Elizondo, executive]

Thank you, Pepe. Our next question is also from Ben, who asks: the increase to your contract margin, how much of that was because of higher ocean freight rates? And if freight rates return to normal levels, how much of the contracted $100 per ton in PET margin could be lost?

[Jose de Jesus Valdez Simancas, executive]

Yes, that's a good question. I would say probably -- in the U.S. market, probably -- I would say, perhaps like $0.05 per pound could be lost from the contract.

[Alejandro Elizondo, executive]

Very well. Thank you, Pete. We have another question coming in via live from Alejandro Chavelas.

[Alejandro Chavelas, analyst]

Congratulations on the results. Just a question. I've been looking at Asian polyester producers. And if I'm reading this correctly, polyester fiber margins have been falling a lot and utilization of polyester producers has been falling a lot because of the COVID lockdowns. Could you help us understand what is the impact of that in your business? Like will PTA in particular -- PTA spreads fall significantly? How do you read this? Because I know it's not exactly the same business as PET, but there are some cross read implications. So if you can help us understand that better, that's super useful.

[Jose de Jesus Valdez Simancas, executive]

Yes. Well, of course, there are impacts. Our exposure to fiber, though, as you know, is very limited nowadays. We shut down our fiber capacity in the U.S. last year. So we have a really very small capacity in polyester fiber. So the direct impact into fibers is very limited.

In terms of PTA, I guess you are right, Alejandro. I mean when you look at the margins, PTA margins in Asia under the circumstances I would say they are on the low side. And I think PTA margins in Asia are on the low side -- I mean, in the low side if you consider cost of other chemicals into the PTA, which have been higher, and cost of energy. So the margins comparing historically, they look okay. But if you add those factors, those cost factors, the margins are actually relatively low in PTA. And I think the explanation is exactly what you are saying, the fact that the fiber -- polyester fiber has not been -- the demand has not been as strong as expected.

So I think we already have some of that in our PTA margins. Again, fiber is not an important sector for us. And PET, what I explained before. PET, we are sort of isolated versus -- at least versus China because of the antidumping. In polyester fiber, we do have also antidumping filament to the U.S. We are going to have a dumping in Mexico against polyester filament from China and India also starting this October. So -- in Brazil, we do have some filament -- textile filament as well. We also have an antidumping against China. So I guess all of these factors sort of protect us a little bit from the Chinese or Asian situation in fibers.

[Alejandro Chavelas, analyst]

Right. Right. I understand. So the impact on PTA margins from these struggling polyester industry is already reflected in current PTA margin also. Right now, it's...

[Jose de Jesus Valdez Simancas, executive]

I would say so.

[Alejandro Chavelas, analyst]

It's more upside than downside at this point.

[Jose de Jesus Valdez Simancas, executive]

I think so.

[Alejandro Elizondo, executive]

Thank you, Alejandro. Well, that was the last question we have in our 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 full transcript on our website at alpek.com. Thank you all for participating today, and have a great day.