Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and welcome to Alpek's First Quarter 2023 Earnings Webcast. We very much appreciate everyone's participation. I am Anton Fernandez, Alpek's IRO. And today, I have the pleasure of being joined by our CEO, Jorge Young and our CFO, Jose Carlos Pons. This presentation is divided into 2 parts. First, Jorge and Jose Carlos will comment on Alpek's first quarter performance, footprint optimization, corporate governance and revised CapEx. Afterwards, we'll move on to Q&A.

Please note that the information discussed today may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to certain risks and uncertainties. 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 it is 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 Jorge.

[Jorge P. Young Cerecedo, executive]

Thank you, Anton. Good morning, everyone, and thank you for joining us. I would like to report that despite the challenging market environment during the first quarter, Alpek delivered a comparable EBITDA of $207 million that was in line with the outlook we envision. We also made progress in improving for asset footprint. Through the rationalization of one of our polyester assets, strengthening our business accordingly, which we will review in further detail later in the call.

Let's start by reviewing the main topics we will cover today. First, I will introduce some of the key highlights for the quarter, and Jose Carlos will cover Alpek's financial performance in greater detail a bit later in this presentation. Second, we will provide more insight into the asset footprint improvement I just mentioned. Third, we will cover Alpek's recent additions to our Board of Directors. And finally, we will provide more comments on our revised CapEx guidance for 2023.

The first quarter results were characterized by lower demand, mainly in the Polyester segment, although we did experience strong signs of recovery as the quarter progressed. The main reasons were still elevated inventories in the value chain, we maintain reduced exports, particularly in polyester due to higher regional prices of key festo paraxylene. Macroeconomic environment pressures such as high inflation rates that impacted consumption. Continuous seasonality for PET and relatively weak demand in some industries such as construction affecting EPS business.

On polyester, Asian integrated ET reference margins were 2% higher versus the previous quarter, averaging $343 per tonne and with a spread between Chinese and Asian reference margins also increasing to $120 per ton. Meanwhile, polypropylene reference margins declined to an average of $0.17 per pound, 26% lower quarter-on-quarter, which is in line with Alpek's expectation. The sequential decrease was mainly due to the rising polypropylene supply in the Americas as new capacity has come on stream.

EPS reference margins have continued to gradually return to historical levels, averaging $0.49 per pound, a 23% reduction quarter-over-quarter. Reference ocean freight costs have continued to normalize to historical levels, resulting in a reduction in impo parity pricing, which is relevant to our businesses, in particular for polyester and EPS.

At this point, Jose Carlos will take over and delve more into the financial results.

[José Pons, executive]

Thank you, Jorge, and thank you all for being here with us today. I would like to share with you some of Alpek main highlights during the first quarter. To begin, overall volume was 1.6 million tons, a reduction of 6% quarter-over-quarter, primarily as a result of high PET inventory levels in the market, seasonality and lower export in the Polyester segment. Comparable EBITDA reached $207 million in line with Alpek expectations for the quarter, however, representing a reduction of 23% quarter-over-quarter, mainly due to lower demand, the decrease in reference margins in the Plastics & Chemicals segment and continued normalization of reference ocean freight costs.

In the first quarter, Alpek paid a dividend of $159 million, reaching an increasing dividend yield of 5.4% for the year. Total volume was 1.6 million tonnes for the period, a reduction of 6% quarter-on-quarter. In the Polyester segment, volume was 939,000 tons, 7% lower quarter-on-quarter. The segment experienced a softness in demand due to high PET inventory levels in the market, particularly at the beginning of the year.

During the first quarter, we also experienced reduced exports, driven primarily from the increased cost of paraxylene due to prices connection between North America and Asia. In Plastics & Chemicals, volume was 222,000 tons, 2% higher quarter-on-quarter and above expectations despite the softness in some industries and additional polypropylene supply in the Americas.

Moving on to raw material price dynamics. The industry experienced a gradual decline in Brent crude oil prices to an average of $81 per barrel, 8% lower than in the previous quarter. Accordingly, U.S. reference paraxylene prices decreased by 3%.

In the Plastics & Chemicals segment, average reference paraxylene prices increased to $0.50 per pound, a 56% decrease when compared to the previous quarter, primarily due to shortages in PET supply. Switching over to EBITDA breakdown for the quarter. Overall, comparable EBITDA for the quarter was $207 million, 23% lower than in the previous quarter. This was mainly due to lower demand, a decrease in Plastics & Chemicals segment reference margins and continued normalization of reference ocean freight costs. It is important to note that these figures were within our quarterly expectations.

Reported EBITDA was $187 million, 1% higher quarter-on-quarter, and this result was primarily incorporates the Cooper River site onetime short-term costs. If we take a closer view of results by segment, Polyester comparable EBITDA was $133 million, 12% lower quarter-on-quarter. As commented before, this result reflects an increasing nation-integrated polyester reference margins, softer PET demand due to higher-than-expected inventory levels and paraxylene prices connection between North America and Asia that continue affecting the importing of the impo parity pricing and experts.

In Plastics & Chemicals comparable EBITDA resulted in $77 million, a 36% decrease quarter-on-quarter. This was mainly due to an increase in supply of volume propylene, affecting reference margins and gradual return to historical levels of EPS reference margins due to lower demand within certain industries such as construction.

With regards to free cash flow generation, net working capital investment increased by $66 million, primarily due to rising raw material prices in the Plastics & Chemicals segment. CapEx totaled $52 million and was mainly allocated for the Corpus Christi polymers project and to a lesser degree towards it's scheduled and maintenance.

Alpek distributed a total dividend of $185 million during the first quarter. Of this amount, $159 million was paid to shareholders as approved by the Annual General Shareholder Meeting and the remaining amount to minority shareholders. Free cash flow for the quarter was minus $29 million.

Finally, regarding the company's financial position during the first quarter, Alpek's net debt increased to $2.1 billion. The last 12 months reported EBITDA was $1.2 billion, therefore, resulting in a leverage ratio of 1.8x net debt to EBITDA. Thank you, everyone. I will now turn the call back to Jorge.

[Jorge P. Young Cerecedo, executive]

Thank you, Jose Carlos. In line with Alpek's footprint optimization efforts, Alpek announced that it would indefinitely shut down the PET resin operations at the Cooper River site, near Charleston, South Carolina. The site was developed in the early '70s and had an installed capacity of 170,000 tons of PET resin. The corresponding PET resin production was transferred to other Alpek's sites, enabling cost reductions of approximately $20 million at an annualized rate. This initiative is aligned with Alpek's effort to continuously enhance our cost competitiveness.

Effects associated with the shutdown during first quarter 2023, include $14 million in nonrecurring reported EBITDA costs, which will be compensated during the year from the cost optimization. Additionally, there is an effect of $47 million in asset impairment, which represented approximately 2% of Alpek's total fixed assets.

At Alpek's Annual General Shareholders Meeting, we accomplished the election of 3 new members to the Board of Directors. These are Jose de Jesus Valdez, our former CEO and 2 independent board members Montserrat Ramiro Ximénez and Alejandro Mariano Werner. As a result, Alpek's Board of Directors is now comprised of 9 independent board members. We are excited to welcome the new members of the Board, and I'm confident that their addition will support Alpek's long-term growth strategy and ESC goals.

To conclude, Alpek originally provided a 2023 CapEx guidance figures based on the long-term growth strategy to strengthen core business and provide strategic and focused growth. We have decided to revise the CapEx guidance to $335 million from the previous amount of $445 million as we are taking more time to further optimize the investment estimates and prepare the projects for final investment decision.

Thank you for your attention. I will now turn the call back to Anton to open the webcast for Q&A.

[Operator]

Thanks, Jorge. [Operator Instructions] Our first question comes from Tasso Vasconcellos from UBS.

[Tasso Vasconcellos, analyst]

I have 2 questions here, more focused on the CapEx, the new guidance here you gave. First, I think it would be great to hear more details on the breakdown for this CapEx from this $335 million for the year. What is the maintenance CapEx? What is CPP, what is strategic investments, cost optimization, growth, if there is any and so on, so a breakdown on the CapEx? And second, we've seen the reduction on this CapEx guidance, right, for the year, but you maintained the volume expectation, revenues, EBITDA and so on. So it would be great to hear from you exactly where this CapEx would be invested. And since it did not impact this year's expectations, what could be the impact on next year's performance. Those are my 2 questions.

[Jorge P. Young Cerecedo, executive]

Yes, Tasso, thanks for the question. I think on the CapEx guidance, basically, it's one of our projects that has the intent to reduce our variable costs that we're going to take more time to further optimize investment and make it more attractive. As far as the remaining guidance of $335 million, the main component is our investment in Corpus Christi polymer that continues unchanged from the last time.

There are other projects for improvements across the plants. But the second largest category would be our maintenance CapEx. So those are the Corpus Christi or maintenance CapEx and other miscellaneous projects across our system. And the project we're taking more time to study and more than anything, further optimized investment has no implications on 2023 volumes or cost. That's more a longer-term projects goal. I hope that answers the question, Tasso.

[Tasso Vasconcellos, analyst]

Sorry, guys. I was with it. Yes, that answers.

[Operator]

Our next question comes from Leonardo Marcondes from Bank of America.

[Leonardo Marcondes, analyst]

Okay. So I have 2 from my side. My first question is regarding the shutdown of the Cooper River site. I would like to know if you guys could share what level -- what should be the level of integrated margins for you guys to decide to reopen the site? And my second question is regarding the spreads. When we look to the PP margins this is the Petroquimica which has been facing the most challenging scenario, right? So I would like to know when do you guys expect a rebound in PP margins to help share levels? And what should be the drivers for this event to pick up the margins?

[Jorge P. Young Cerecedo, executive]

Okay. On the Copper River question, I think it's very likely that we will go back to and reconsider the asset to run again. As I told you -- as we mentioned earlier, this is -- an asset that -- this is a asset that has the highest cost structure, and it was also in our long-term plans to eventually replace this asset with more competitive capacity. We have now more competitive capacity in the system with the recent addition of the Oman facilities, and we have Corpus Christi or share of Corpus Christi underway.

And the relative size of the Cooper River site would not really materially impact the total margin of the company in case we were going to restart it. And -- but I hope that answers the first question. On the press, in particular, polypropylene, I think when you look into consultant forecasts, generally speaking, it is believed that the current level seems to be the bottom or very, very close to the bottom. I think we are pleased to report that in spite of that situation or performance in Plastics & Chemicals or relative performance in Plastics & Chemicals, in particularly in polypropylene is very strong compared to peers.

And I think the -- there is now more capacity. And I think that capacity is going to over the next few years, next couple of years is going to be absorbed with the -- in the market when the market grows a little bit, and that capacity is absorbed and -- but that's our view on the polypropylene spread. So bottoming out, gradual recovery, but over time because it was a relatively large amount of capacity that came on stream. But again, our asset and our business is very well positioned to weather these next few years.

[Operator]

Our next questions come from Nikolaj Lippmann from Morgan Stanley.

[Nikolaj Lippmann, analyst]

My first question pertains to the debate between volumes and margins. So volumes as far side consumer is really weak. We look at Nielsen or category in North America or U.S. looks to be almost low double digit. Crown was up. Can you talk a little bit about that dilemma? And to what degree are you hogging margin contracts and letting go of a lot of volumes? What are really the dynamics that are in play here?

And then the second question is pertaining to PET. How is the recycle product performing in this volume downturn, both in terms of the ability to defend the margin and also the stickiness of these contracts. To what degree are you finding a higher customer loyalty in the PET project? And then finally, if you -- you had comments in the prior quarter pertaining to the Russian sourced PX that, of course, would be lower priced than how that was creating a degree of disruption in some of your markets. How is that playing out? Where do we stand now?

[Jorge P. Young Cerecedo, executive]

Yes, Nikolaj, thanks for the questions. The first question is on the volume and the last question about the Russian situation and the paraxylene supply are somewhat or to a large extent related. I think in the volume question, there is a component that we have reduced our participation in some regional markets, especially export markets from our facilities, not necessarily or the markets where our facilities are located, both export markets. And that is because as we mentioned the last time, we continue to experience higher relative prices of paraxylene in our region.

On one hand, those are driven by higher alternative values for the feedstocks that are needed to make paraxylene. That situation is not totally new because it happens from time to time. And normally, we have the ability to import paraxylene and to manage when that situation happens.

The issue that we continue to face is that over the last 6 to 12 months, especially since the war between Russia and Ukraine began the cost of transportation or liquid petrochemicals, which is very different industry than the transportation or dry goods in containers. Transportation or liquids has increased in cost. And because there is a very high demand for vessels to move liquids. So that is causing the import prices of paraxylene to be also more expensive than normal and I think within that situation, it's going to be here perhaps a couple or a few more quarters. We don't think it's a structural long-term issue. But that is one of the reasons why we have withdrawn from some markets.

And yes, in domestic markets to a much lesser extent, there are situations where we choose to protect margin versus volume. But the bulk of our volume adjustment is on reduced exports and highly, highly correlated to the more expensive paraxylene. But again, we have tools to deal with it. But our key tool, which is to import right now, we are also facing higher transportation cost in liquids mainly for -- due to the Ukraine Russia war and all the effects that created on the rebalancing of the world of moving liquid fuels and especially liquid fuels that drag liquid petrochemicals.

On rPET, the question on rPET continues to be an essential component of our offering for the customers. We delivered rPET content to our customers in various forms. We can make pellets that are 100% made of recycled polyester or we can introduce recycled content into our polymer lines and repolymerize the molecule in line and repolymerize it and offer a raising with 15% to 25% at least percent rPET content.

So both presentations are very relevant for us to align with our customers. And so those are, again, go hand in hand with our priorities to supply our key customers in the region. So that continues as an essential component.

[Nikolaj Lippmann, analyst]

May I ask for just a follow-up question there. Are you finding -- may I ask actually 2. Are you finding that in the North America, so the majority of this problem is outside of North America, I understand. So -- but there's still a bit of a downturn in the North American market. Are you finding rPET to be defensive? Are you finding higher level of customer volume and margin loyalty in the product vis-a-vis virgin or is it about the same? And then the follow-up question number 2 is, are you seeing the issue of the PX even in the U.K. market or is it in other regional markets?

[Jorge P. Young Cerecedo, executive]

Yes. The -- I think, again, the rPET that we sell, for the most part goes to customers that are also very important customers for virgin PET. And again, the offering goes hand in hand. So the discussion that we had with them, it's always on both products. We have programs that have rPET content in the 2 presentations that we provide to them with them and programs with virgin. And again, there is a trend and a desire to continue to increase our content and we're working on that. But I wouldn't say that there is more loyalty or one or the other. Again, our customers are very committed to PET packaging. I think they are very interested in PET packaging brings them many advantages for their business and the intent is to make PET packaging more sustainable and recognize as going trend on hand.

In markets, going to the raw material questions like for U.K. In U.K., we would have the ability to source direct [indiscernible] feedstock. And that's a way for us to be in that particular market with our raw material competitiveness, and we can compete effectively in that way. That strategy would be much more cumbersome in other regions because there are more logistics barriers and that's in the other regions like in the Americas, we have our PTA plants, and that will be more difficult to even consider. But in the U.K., in particular, we can source Asian origin PTA. I hope that answers the question, Nick.

[Operator]

Our next question comes from Andres Cardona from Citi.

[Andres Cardona, analyst]

Let me ask you about the integrated PET margins and how do you see them performing into the early second quarter? And also you may provide also some short-term color about what's happening on volumes or what to expect in second quarter.

[Jorge P. Young Cerecedo, executive]

Yes. I think there are still probably very similar levels as the first quarter. I'm talking about the reference margin. There is some compression in the gap between the China margin and the Asian margin, but relatively small, I would say, generally speaking, still in line with the guidance that we have.

As far as volumes, we did see a gradual improvement within the quarter -- on the first quarter. We continue to see that in the second quarter is gradual. And then -- and we see also signals for that to continue to improve in the second half. I think the -- obviously, there is the seasonality of PET rising. Again, these are signs that the -- we expect the volume to pick up some. The extent of how much it picks up is still to be determined. But yes, we're seeing some signs of gradual improvement as the year progresses beginning even within the first quarter.

[Operator]

Our next questions come from Regina Carrillo from GBM.

[Regina Carrillo Villasana, analyst]

I have a more strategic question. Do you see any potential benefits coming from reinsuring in the short or medium term for your operations in Mexico or the U.S. or maybe for one of your 2 additions.

[Jorge P. Young Cerecedo, executive]

I think the new shoring, generally speaking, would be a positive event, mostly for our plastics and chemicals. We know that they serve some industries are related to the industry that would benefit from new shoring but yes, that will definitely be a positive factor for us. But obviously, it will happen gradually over time.

[Operator]

We have one last question through the Q&A function. The question is from Andres Lomeli from LCA Capital.

[Andres Lomeli, analyst]

And the question reads, given the reduction in CapEx expectations for 2023 to $335 million, will there be a potential for an extraordinary dividend payment.

[José Pons, executive]

Thank you. Yes, I think that's a very good question. Certainly, our expectation is to take a decision on the second half of the year, there's a potential for an additional dividend. We currently maintain a very prudent leverage. As you saw, we ended up with 1.8x net debt-to-EBITDA. And therefore, with the improved working investment that we're going to see for this year, the potential upside on working capital, we could see the possibility for an incremental dividend in the second half of the year. That's a decision that certainly we will take towards the latter part of the year.

[Operator]

Jose Carlos, I believe that was the last question in the queue. As always, I'd like to remind you that you can find both a video recording of today's webcast as well as a transcript on our website at olpek.com. Thank you all for participating in Alpek's webcast. Have a great day.