Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2024-Q1

[Barbara Amaya, executive]

Good morning, everyone. Welcome to Alpek's First Quarter 2024 Earnings Webcast. I am Barbara Amaya, Alpek's IRO, and I'm pleased to be here today with Jorge Young, our CEO, José Carlos Pons, our CFO, who will be presenting today's material. Jorge will provide an overview of quarterly results, including the progress we have made this year to position Alpek for success. Jose Carlos will then cover the quarterly financial results in greater detail. And then, Jorge will outline our expectations for the remainder of the year. We will then open it up to your questions.

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. We express our financial results in U.S. dollars unless otherwise as specified. For your convenience, this webcast is being recorded and will be available on our website. Jorge, I'll turn the call over to you.

[Jorge P. Young Cerecedo, executive]

Thank you, Barbara. Good morning, everyone. I'm going to start by stating that first quarter results were in line with our guidance expectations. We have already begun to see some demand recovery which has led to higher volumes across our product portfolio, specifically in the Polyester business where there was an expansion of the company's PTA exports. Raw material prices increased and so did the disconnection between Asian and North American prices for Paraxylene and Styrene. In terms of PET reference margins, this rebounded during fourth quarter 2023 and have since stabilized. However, there were declines in the reference margins for the Plastics & Chemicals segment, particularly for EPS although they are expected to gradually recover.

I am pleased to share that we have made significant progress in achieving structural cost reductions and reinforcing our balance sheet. This is aligned with our commitment and our strategy to continuously enhance our competitiveness and to position favorably to navigate industry cycles. Regarding our goal of reaching a total of $75 million in savings, we have already realized annualized benefits of approximately $60 million from footprint optimization, more competitive electricity agreements and partially from organizational restructuring. Furthermore, we're on track in terms of enhancing our operational efficiency through investments to standardize new systems. Overall, we expect full savings to materialize by the second half of the year on a run rate basis from the combined execution of all the above initiatives.

We are committed to continuing to identify cost savings opportunities and we're assessing further possible efficiencies. Regarding our prioritization of free cash flow and the maintenance of healthy leverage levels, the year started off with disciplined and prudent CapEx spending. There was an increase in net working capital due to rising raw material prices and sequential volume growth. However, we remain committed to achieve our target leverage of 2.5x by year-end through our structural cost reduction initiatives, disciplined capital allocation, and we're also forgoing a dividend payment in 2024. Regarding our ESG efforts, I would like to highlight that we've made steady progress in our sustainability results as evidenced by our ESG agency's course.

CDP, the Carbon Disclosure Project, updated Alpek's supply chain rating to a B- from a B given the company's progress on the topic, such as SBTi's Scope 3 target approval, which has gained greater relevance as well as incremental disclosure of downstream and upstream supply chain emissions. Additionally, the Sustainalytics Risk Rating improved by 23% to a score of 20 as a result of enhanced disclosure in key environmental KPIs, strengthening our governance practices and the expansion of programs for employee safety, integrity and health. With this improvement, we are now in the top decile of our industry. This is great news for our sustainability goals, and we remain focused on the continued development of our ESG efforts going forward. At this point, I will turn the call over to Jose Carlos to cover our financial performance in more detail.

[José Pons, executive]

Thank you, Jorge. Good morning, good everyone, and thank you for joining us. Let me provide more insight into our first quarter performance. Volume reached 1.2 million tons, in line with our expectations. This was an increase of 9% quarter-over-quarter and 4% year-over-year. Mainly due to demand recovery, particularly in the Polyester segment, supported by increased PTA exports and to expected seasonal demand improvement as we gradually enter the period of warmer temperature in our markets. Reported EBITDA was $168 million, including combined inventory adjustment and carryforward effects of $18 million as well as a nonrecurring effect of $3 million from the organizational restructuring in the Polyester business. Alpek generated $154 million in comparable EBITDA due to a combination of factors that included a stronger volume, stable PET reference margins and Plastics & Chemicals reference margins.

Now turning over to the Polyester segment. Volume was 990,000 tons, a significant improvement of 9% quarter-over-quarter and 6% year-over-year. This was a combination of seasonality as well as the fact that customers increased their volume as they anticipated heightened demand all aligned with our guidance expectations. Asian integrated PET reference margins remained steady, increasing by 1% quarter-over-quarter, averaging $288 per ton and reaching close to $300 per ton by March. Chinese integrated PET reference margins decreased slightly to $154 per ton. U.S. reference Paraxylene prices saw a greater increase. Pricing by 5%, resulting in a spread between North American and Asian prices of $230, 28% higher than the previous quarter.

Comparable EBITDA was $107 million, down 19% year-over-year. This was partially due to the reference margins declining from historical highs in previous years. Now let's dive into the Plastics & Chemicals segment. Volume was 212,000 tons, up 10% quarter-on-quarter, driven by typical seasonality. If we observe the year-over-year figure, there was a 5% decrease as certain industries such as construction remain under pressure. However, we're expecting a gradual improvement as housing starts have started to increase. Polypropylene margins experienced a decrease to $0.15 per pound, down 12% from the previous quarter, mainly due to the significant increase in raw material prices. Average reference propylene prices increased to $0.55 per pound, up 18% from the previous quarter.

And for EPS, North American reference margins also declined, reaching an average of $0.18 per pound, 32% lower quarter-over-quarter. There was also an increase in average reference prices as Styrene rose to $0.58 per pound, up 25% compared to the fourth quarter. We expect margins to improve in the coming months as North America raw material supply normalizes. Comparable EBITDA was $43 million, flat quarter-on-quarter, yet down 44% year-over-year, resulting from tighter reference margins, particularly from EPS. Turning to free cash flow. Disciplined CapEx remains a priority for Alpek. And for the first quarter, CapEx totaled $34 million, mostly focused on scheduled maintenance. This figure was below guidance, and we remain on track for the expected CapEx of $200 million for the year.

Meanwhile, net working capital increased by $160 million mainly from the rising raw material prices from all of our products and the sequential volume growth. In the second half of the year, we do expect a recovery, however, not at the high levels we experienced in 2023. As petrochemical prices are not expected to decrease much further. And finally, regarding the company's financial position, I would like to highlight that we continue to prioritize balance sheet discipline. Our debt profile remains at a healthy level as we have no upcoming maturities. Our net debt increased sequentially to $1.8 billion. However, this was down 13% year-over-year as our efforts to improve cash flow generation continued to yield results.

Last 12 months reported EBITDA was $495 million, resulting in a net debt-to-EBITDA ratio of 3.7x. This leverage level was anticipated. We expected a decrease in our last 12 months EBITDA as we transition from higher margins and to a lower cycle environment. As we have previously stated and shared with our rating agencies, we expect leverage levels to decrease more notably towards the second half of 2024. We're confident that our continuing [indiscernible] actions, including the structural cost reduction initiatives and disciplined capital allocation as well as forgoing a dividend payment this year will allow us to come closer to our target leverage of 2.5x by the year-end, setting a strong foundation to our future. With that, I'll turn the call back to Jorge.

[Jorge P. Young Cerecedo, executive]

Thank you, Jose Carlos. I would like to highlight that we continue to make important strides with the priorities mentioned on our previous quarterly webcast. These are: first; achieving structural cost reduction. As I mentioned earlier, we have already made 80% progress towards our goal, and we are committed to identifying additional opportunities in order to maintain this momentum. Second, capitalizing our position as a strong domestic supplier. We remain confident in our ability to be a leader in our industry by reliably delivering a broad offering of high-quality value-added products with prompt delivery and recycled content. We've been making progress in sustainable packaging, particularly through efforts to develop recycled EPS as well as through gaining market share in PET sheet due to its properties that allow to be used in a range of applications such as poultry packaging; and third, maximizing cash flow and further strengthening our balance sheet.

This includes the evaluation of the investments of nonstrategic assets that we can monetize. For example, the filament site we shut down in Monterrey, or the site in Salamanca, Mexico previously used for Caprolactam production. As 2024 progresses, we believe demand will gradually normalize as the industry heads towards a more stable year. Reference margins are still expected to remain relatively low due to ongoing overcapacity. However, in line with our outlook. Alpek will be in position to take full advantage as volumes and margins recover in our industries. I would like to take a moment to thank our employees, our customers, suppliers and financial institutions for supporting our business and look forward to what we can achieve together over the remainder of the year.

Finally, I would like to reiterate that figures of the first quarter, aligned with our expectations, laying the groundwork for full year positive results, and we're confident that we will meet our full year guidance. Barbara, I'll turn the call back to you.

[Barbara Amaya, executive]

[Operator Instructions] Our first question comes from Bruno Montanari from Morgan Stanley.

[Bruno Montanari, analyst]

Hello, I have a few questions on our side here. Thinking about the leverage and the pace for you to get to 2.5x. So I understand this would be closer to the end of the year. So the question is, do you have any commitments with the rating agencies or creditors that you have to reach that level by the end of the year? Or in a scenario where margins do not evolve as expected, can that target shift perhaps into 2025? The second question is if you could comment on how working capital should evolve now in the second quarter of the year? And then third, if you could comment on the main trends now in the beginning of the second quarter? That would be great. Thank you very much.

[José Pons, executive]

Thank you, Bruno, Jose Carlos speaking. Well, the short answer to your question regarding our commitment to reach 2.5x, it's no. However, it's desirable, and we're doing everything in our power to reach something closer to 2.5x by the end of the year. We have met with all of our rating agencies since the last few months. And we share with them the retail plans for 2024 performance, how we are planning to deleverage which actions we're taking as we already explained in the call. And well, I don't want to put words in their mouth. But in the end, I think they're comfortable with what we're doing. And they believe that we can achieve something closer to 2.5x by the end of the year. So no clear commitment, but in the end, we want to be there by the year-end or something very close to that.

[Jorge P. Young Cerecedo, executive]

Bruno Jorge here. Regarding your two other questions, first on working capital. Yes, in the first quarter, we saw a rebound in working capital. But as we explained, it was driven by the sequential volume growth, which was significant. Fourth quarter demand was particularly low. So that was -- probably we recovered more working capital in fourth quarter, and we have to rebuild some of that in first quarter. But we would expect second quarter, we don't expect a significant increase. We need to see how the business conditions evolve. We still ended with some opportunities in inventory and some of the reference prices will begin to stabilize. So we feel much better about the cash flow in second quarter. And as far as demand signs in Q2, yes, we're seeing strong demand signs across all our segments, that the volume, again, is perhaps normalizing to levels of a more normal year. We have, right now, full confidence that we will meet the volume that we set in our guidance of an increase of 5%. So again, I think we are with good signals going into second quarter.

[Barbara Amaya, executive]

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

[Leonardo Marcondes, analyst]

My 2 questions are regarding the spreads and what you expect from them? Well, firstly, a couple of weeks ago, Fed took a decision that changed the market sentiment and now I think that most of the market -- most of the market participants believe that we should see higher rates for longer, right, which is something that we were not expecting before. And now and demand is already very low, right? So my first question is how the Fed's decision impact the fundamentals of your guidance for this year? And my second question is regarding the polypropylene spreads. We have seen those very weak and pressured by high propylene price in the U.S., right? However, in our view here, a potential upside for spreads could come from some capacity shutdown. So my question for you guys is, what do you expect in terms of capacity shut down for this year and maybe the next one as well for polypropylene?

[Jorge P. Young Cerecedo, executive]

Yes, Leonardo, thank you for your questions. I think the first question on the most recent trend on yields from the signal, the Federal Reserves is provided to the market of light optic. I would say for the most part, our products are not very sensitive to those dynamics, we tend to have products that go to day-to-day consumer applications. We have some products that are more exposed to those cycles. Some of our EPS goes into construction. As Jose Carlos did mention, we are starting to see some trends for some recovery on housing starts. But yes, generally speaking, higher interest rates will tend to slow down naturally construction due to higher interest rates and mortgage rates and so forth. But that's probably the 1 product where we are a little bit more sensitive for the most part is less sensitive to make further moves.

As far as generally speaking, spreads for our key products, as we mentioned, we are acting as if the spreads are going to remain on the relatively low side of the cycle. And as a result, we are sharply focused on our cost enhancement or cost improvement initiatives. I think as far as optimizing our footprint, we did those steps last year. We see others in the industry now signaling in various products potentially looking at their assets and potentially taking some actions, if and whenever those actions happen, obviously, those are steps that would contribute to a more balanced environment. But it's probably difficult to venture specifically what does that mean in terms of margins. We think those are good steps, I mean, in the polypropylene on the PET industry. And again, we expect the spreads to remain on the low side and eventually gradually recover as the excess capacity is absorbed by the market. And if that happens sooner because other players in the industry adjust their footprint, then we will be prepared for when volumes and margins do recover. Hope that answers the question, Leonardo.

[Barbara Amaya, executive]

Our next question comes from Luiz Carvalho from UBS.

[Luiz Carvalho, analyst]

I have basically 2 questions here. The first one is you implemented quite interesting plan in order to actually reduce costs, which has been quite advanced, but my question here is what are the other opportunities in order to try to reduce the leverage of the company if thereto the petrochemical cycle take longer to rebound? That's the first one. The second, it's more broad, but for Jorge, you have been now 1 year as the company's CEO, right? So if you can, I don't know, try to give us a color in terms of what are the main opportunities, what are the main challenges that you map it during the period. And of course, what you want it to be accomplished? And what else do you think that has to be delivered over the next couple of years?

[José Pons, executive]

I'll take the first question. Luiz, this is Jose Carlos speaking. Great question. And well, it's -- hopefully, we were getting that question because we really compromised on reducing cost, and we're getting a passion on the results that we have. So as you said, so far, we've made very good progress, and those results are already coming into results. We expect to be at full rate of $75 million by year-end. So that is something that will certainly improve our competitiveness. We're not stopping there. We're looking at other alternatives that will improve our cost. For example, we're looking at additional restructuring our fixed cost. We're looking actively to our footprint to see if there are any additional opportunities. And we also highlighted that we're doing re-engineering of our key processes to see if there are opportunities to centralize certain functions, et cetera. That's something that's probably going to be more active in 2025.

We're now redesigning -- designing the -- finding the opportunities. And probably in the last part of this year will be with a greater level of detail that we can share with you guys. And in addition, we're looking to divesting noncore assets. We already shared that we have 1 very big piece of land here in Monterrey. There are other assets that we have throughout Mexico and other areas that might come with a good return and will allow us to reduce our leverage. So that's basically what we're doing. And there are a lot of activities throughout the company to improve our competitiveness and reduce our leverage.

[Jorge P. Young Cerecedo, executive]

Luiz, This is Jorge. On your second question, I would say the key challenge in the first year of my tenure, I think it was the transition from the peak cycle in '21, '22 to this acute lower cycle in '23, and we are still navigating that cycle. It happened quite fast. I think in our 2 key core strategies for Alpek is to continuously strengthen our business. Becoming more competitive. I think the low cycle has pushed off to accelerate some of those actions. We still have other cost reduction opportunities in the pipeline. Some of them will require investment. But as we focus on keeping our leverage in high priority, I mean those opportunities are -- we're going to take a little bit more time to bring on the table.

And another key goal besides to continuously strengthen our business is to grow the business. And we continue to explore ways and, we have analyzed many opportunities to grow the business even in this low part of the cycle. And I think when we have the combination of the right opportunities for us and we'll bring those to the table and, while we, in parallel, put a lot of focus and priority in our balance sheet. So again, I think going forward, to continue to strengthen the business and to find avenues to grow our businesses, adjacent businesses and to grow at taking in year-end. So I think that remains our focus. I hope that answers the questions.

[Barbara Amaya, executive]

Our next question comes from Andres Cardona from Citi.

[Andres Cardona, analyst]

I have 3 questions here. You are talking about the organization optimization on expenses. And I was wondering if you can give us a sense of how big this expense could be in the first half of the year? And if it includes on the guidance for 2024? The second one is from a credit rating perspective, do they focus on the reported EBITDA or the recurring metric? And the third one is if you could provide some update about what you are seeing on the PET margin dynamics or the early days of the second quarter?

[Jorge P. Young Cerecedo, executive]

Yes, Andrea, if you don't mind, I'll take the first and the third question. And then Jose Carlos will take the second question. Yes, the organization, optimization expenses and everything is included in our guidance and our numbers. I would say for the most part, those have already been in court. I mean more things will happen going forward, but we are highly advanced by the end of the first quarter. And again, those efforts and expenses are already reflected in our actual numbers and guidance. The question on PET margins, look, as we start the second quarter, I would say they have remained somewhat steady from the first quarter so not significant change. What we have seen is this addition, most recent disruption in trade routes from the conflicts in the Middle East.

For the most part those have been neutral to positive for us. Some opportunities have opened and we have capitalized with very agile response that explains some of our additional volume in PTA exports. And that might continue into second quarter. But the reference margins, Asia based, I would say, steady. And in our case, we're capitalizing some opportunities, but more related to logistics -- global logistics. And I'll pass the mic to Jose Carlos on the question on the EBITDA that is relevant for rating agencies.

[José Pons, executive]

Thank you, Jorge. Andres well, as I indicated, we've met with the rating agencies, we shared with them our detailed plan for -- in terms of guidance on results for 2024. What we're doing in terms of cost, what we're doing in terms of balance sheet? And what our debt profile looks like? So I'm just taking this moment to kind of share where we have to discuss with the rating agencies. I think we had very good meetings. We have a quarterly meeting with each of the rating agencies. So we will meet with them very soon to update them where we are. We hope that they see progress in our performance. And sorry for not answering your question upfront, but in the end, your short answer is reported EBITDA.

[Barbara Amaya, executive]

Our next question comes from Alejandra from JPMorgan.

[Unknown Analyst]

I just wanted -- it was just a follow-up on the divestments or the possible divestments. I'm just wondering if there's a time frame for you to complete this or if there is anything advanced or if it's very early stages still?

[Jorge P. Young Cerecedo, executive]

Yes. I think the main asset we are looking is the site, the former site where we used to produce fibers in the center of Monterrey. It's probably going to take us a little while. It's a very large site in the center of the city. It has important potential value as real estate development going forward. But the current state is still an industrial side that is just shut down. So I think we prefer to take our time and not put any specific time line on the table. I think, obviously, we'd like to realize value as soon as possible. But in this case, there is also the high potential given its location and site. So it's an interesting asset, and we're looking into how to do it to maximize value. So the timing is -- again, it's not our top priority, but maximize value. I think in other noncore assets, those tend to be smaller and in those just the sooner we realize the value, the better. Hope that answers the question, Alejandra.

[Barbara Amaya, executive]

Our next question comes from Liliana from GBM.

[Liliana De Leon Meza, analyst]

The first one would be related to what you previously mentioned, the antidumping. Sorry, the restructural -- organizational restructuring. What should we expect about it? And my second question is, do you see any potential benefits from the antidumping measures in Mexico that will be applied to certain plastics?

[Jorge P. Young Cerecedo, executive]

Thanks for the question on the restructural of our organization to save -- to improve our competitiveness. Again, the progress in execution is very high. So the impact is fully baked in our guidance already. So if you remember last quarter, we put a target of $75 million. And I think we split that in two portions, $40 million coming from footprint optimization. Those have been in place since the end of last year. And $35 million more from both the organizational restructure and the implementation of new systems. So the second part is advanced 70%-80% and the overall progress is well above 80%. And again, all of that is part of our guidance and expectations in 2024.

And the questions on antidumping in Mexico. Well, I mean, the industry in the -- there are two things, right? The PET industry in particular, did present an antidumping case. Presented last year. And earlier this year, the Mexican government be open or did allow the investigation to open. And right now, they are in the process of due diligence, asking questions and information to relevant Paris, and that process is ongoing. And that's an antidumping against the Republic of China. On Monday, together with several hundred other products, the Mexican government did announce an increase of duties on a list of products. Some of our key products are included there, like EPS and PET. But at the end of the day, we are committed to fair trade. We are committed to offering competitive high-quality products to our customers. And I think we need to see how the market conditions there'll still be stiff competition from local players, from regional players from several countries that are not impacted by these measures.

I think we acknowledge the involvement is trying to address on fair trade practices, but competition will remain very stiff. And we are eager to compete in that market with our products and again, we -- I think it's premature for us to try to ascribe any specific value to any specific reduction. Again, we are committed to fair trade and in the industry, we will still have strong competition from many players.

[Barbara Amaya, executive]

We have a question through the Q&A functioning chat. I will proceed to read the question. In Slide 12 shows a debt increase. How is this affecting the covenant implied with the debtors in terms of any of a waiver?

[José Pons, executive]

Thank you. Well, what I can represent today to you is that we don't have any issue on complying with our covenants with any of the financial institutions that lend us money. So at this moment, there is no risk on us bridging any of the covenants as we are expecting the debt to gradually reduce. And as already indicated, we're expecting to be closer to our target of 2.5x. So no issue on covenants at this moment.

[Barbara Amaya, executive]

Thank you, Jose Carlos. We have another question from Bruno Montanari from Morgan.

[Bruno Montanari, analyst]

Yes. So just a follow-up on the monetization of nonstrategic assets. Would you be able to provide us with a range of how much cash you would be able to raise with those throughout the years?

[José Pons, executive]

As Jorge indicated, we don't have any specific time line. So it's difficult to tell you when we're going to get the money. But the 1 asset that is more valuable, as already indicated, is the one that we have in Monterrey. It's close to 50 hectares of land in the center of Monterrey. That could be valued, depends on what the strategy and we're actually working on that strategy. Do we develop it and participate in the development or do we sell the land. In the event we sell the land, it could be between $50 million to $100 million. The other assets that we have, let's say, on the list to be sold, it should be less than $20 million to $30 million, not that material. But we continue to look at opportunities. There might be, this is an ongoing activity, and we probably will find additional. So we'll keep you posted on any progress that we make on this front.

[Barbara Amaya, executive]

We have another question from the chat. I will proceed to read the question. While you mentioned that you are on track with guidance for the year, do you anticipate any potential offsets that could further drive results?

[Jorge P. Young Cerecedo, executive]

I'll take that question on -- yes, potential offsets for us. I mean we continue to seek for further areas of opportunity to improve our cost structure. So that effort continues. And so we have, again, some things in the pipeline but we need to fully assess those before putting those on the table, but that's one area. I think the logistical constraints that are happening in the world because of the Middle East conflicts, I think the net result is that those we believe tend to put at least some level of upside for us. So we try to -- I mean, in the first quarter, in the second quarter, we did capitalize on some opportunities in that regard. And again, we're watching the -- all industries right in all our products as potentially other participants in the industry consider actions in their footprint. So that might bring opportunities to our system.

And again, those are the key aspects that we're watching also, I mean, we also follow on Monday, fresh news on trade actions by certain countries. And as I mentioned yesterday, we welcome fair trade with international trade that is fair. I think we tend to have more opportunities for Alpek. So that's potentially a list of items in this regard.

[Barbara Amaya, executive]

Thank you. That was our last question in the queue. Thanks, everyone, for joining our webcast, have a great day.