Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2021-Q2

[Alejandro Elizondo, executive]

Good morning, and welcome to Alpek's Second Quarter 2021 Earnings Webcast. I'm Alejandro Elizondo, Alpek's Investor Relations Officer. And today, I have the pleasure of joined by our CFO, Pepe Valdez; and our CFO, José Carlos Pons.

This presentation is divided into 2 parts. First, Mr. Valdez and Mr. Pons will provide commentary on Alpek's second quarter 2021 performance and an update on relevant events. 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 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 newly redesigned webcast located 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. I hope you are all well -- you are all doing well.

Today, I am excited to share with you that Alpek has delivered yet another strong quarter. I mean a booming global economic environment. During the second quarter, in addition to achieving record volume highs, we achieved our highest month ever in terms of comparable EBITDA.

Let's start by reviewing the main topics that will be discussed in today's webcast. First, Alpek has greatly surpassed financial performance expectations for the second quarter. José Carlos will review this in greater detail. Second, Alpek made large strides in its long-term growth strategy by acquiring CarbonLITE's rPET facility. Third, Alpek has continued to make progress in its ESG efforts. And fourth, we will provide additional insight into our revised 2021 guidance as per the earnings report released yesterday.

Providing some context for this quarter results, the increase in the amount of people getting vaccinated against COVID-19 has improved market confidence and therefore, continued strengthening the global economy. This stronger economic activity has generated rising demand for petrochemical products, including PET. As such, during the second quarter, Asian integrated polyester reference margins further improved to an average of $356 per ton. This was much higher than Alpek's revised guidance figure of $285, which was based on the supply-demand balance expectations prevalent at the end of the first quarter. Similarly, the market has experienced a stronger demand for polypropylene.

[Alejandro Elizondo, executive]

Apologies, we have technical difficulties. We will now continue the call.

[Jose de Jesus Valdez Simancas, executive]

Similarly, the market has experienced a stronger demand for polypropylene. This has kept this product inventory levels low in North America, thereby extending the positive effects polar vortex has on margins. In the second quarter, margins continued to strengthen to an average of $0.47 per pound. We believe this tendency has the potential to carry over into the third quarter.

At this point, I would like to turn the call over to José Carlos, who will go into more details regarding the positive impact of this event on our financial results.

[José Pons, executive]

Thanks, Pepe, and thank you all for being here with us today. I want to begin by highlighting the company's outstanding performance throughout the quarter. OpEx achieved an overall volume of 1.2 million tons, a record high for any second quarter period in our history. Comparable EBITDA of $225 million as a result of record second quarter volume and higher-than-expected PET and polypropylene margins, as discussed by Pepe. A leverage reduction to 1.3x as last 12 months EBITDA significantly increased and strong results offset CapEx and dividends in the quarter.

Turning our attention to volume. Alpek reached 1.2 million tons this period, setting a record for any second quarter in our history and achieving an 8% increase year-on-year. In the Polyester segment, volume was 1% higher versus the figure for last year due to a strengthened demand. Volume decreased by 5% versus the previous quarter as a severe drop in Altamira temporarily affected our PTA production rates.

In Plastics & Chemicals, volume increased by 45% year-on-year, mainly due to the managed strength across the segment as well as the incremental volume from the Styrenics business we acquired in the United States last year. This figure exceeds our highest ever Plastics & Chemicals volume set in the fourth quarter in last year. It is important to remember that 2020 figures were adversely affected by shutdowns in the construction and automotive industries at the height of the COVID-19 pandemic. Moreover, if we exclude our recently acquired EPS sites, volume would have been still 25% higher versus last year.

Moving on to raw material price dynamics. As the global economy continues to strengthen, demand for refined products has kept rising, leading to an increase in average spot Brent crude oil to $69 per barrel, 13% higher than in the previous quarter. Correspondingly, U.S. reference paraxylene prices also increased by 12% versus last quarter. In Plastics & Chemicals, propylene prices averaged $0.67 per pound, an 8% decrease when compared to the previous quarter, but rising to $0.74 per pound in June. This rise in prices toward the quarter end generated a positive inventory adjustment and a carryforward effect across both of our business segments.

Switching over to our EBITDA breakdown for the second quarter. We can see that comparable EBITDA was $225 million, 11% higher quarter-on-quarter. As Alpek experienced record second quarter volume and PET, polypropylene and EPS margins were significantly higher than expected. Reported EBITDA was $273 million, 268% higher year-on-year as this result also includes a noncash inventory gain of $18 million and a positive carryforward effect of $29 million.

In terms of results by key segments, we can see that polyester comparable EBITDA was $102 million, increasing by 14% quarter-on-quarter. Our results largely benefited from a rising average Asian integrated PET margins to $356 per ton. At the same time, Plastics & Chemicals comparable EBITDA was $120 million, an increase of 23% quarter-on-quarter since polypropylene margins increased by 46% as the effects from the Texas polar vortex have persisted and thus, inventories remain low.

With regards to free cash flow generation, net working capital investment decreased by $6 million as feedstock price increases during the quarter were more than offset by an improvement in supplier credit terms.

CapEx totaled $132 million and was mainly allocated towards the acquisition of CarbonLITE's rPET facility. Free cash flow totaled $90 million as strong EBITDA more than offset this quarter's CapEx. Alpek also paid out a dividend of $128 million, which has been approved during the Annual Shareholders Meeting held in March.

Finally, regarding our financial position, Alpek's net debt at quarter end increased marginally to $1.25 billion. Last 12 months EBITDA increased sharply this quarter, resulting in an improved leverage ratio to 1.3x net debt to EBITDA, more than in line with investment grade requirements. If considering net debt to comparable EBITDA, we can also see that Alpek has further improved this ratio to 1.7x.

Thank you, everyone, and I will now turn the call back to Pepe.

[Jose de Jesus Valdez Simancas, executive]

Thank you, José Carlos. Switching over to our most recent events, Alpek made important strides this quarter on the fostering a circular economy pillar of its long-term growth strategy. On June 7, the company announced its acquisition of CarbonLITE's state-of-the-art rPET recycling and pelletization facility in Reading, Pennsylvania in the United States for $96 million on a debt-free basis. This site is one of the largest integrated rPET facilities in the Americas meaning it is equipped with a solid-state polymerizer designed to produce food-grade pellets. The rPET format needed to enable fully circular bottle-to-bottle recycling. With this acquisition, Alpek has grown its total rPET output capacity to 282,000 tons, reaffirming its position as the largest PET recycler in the Americas and achieving the company's target of supplying its customers with 25% rPET content before 2025. The company expects to conclude commissioning and begin production in the third quarter of this year.

Moving on. Regarding ESG, a topic that has continued to climb higher on our agenda in recent years. Alpek during 2020 was able to increase rPET infrastructure, as mentioned earlier, redefine its dynamic materiality metrics, identifying the most pressing ESG topics for our stakeholders, reduces scope 1 and 2 carbon emissions by 8.7%, reduce total water consumption by 7.7%. And today, I'm proud to report that as a result of these actions, we have been included in the Bolsa Mexicana de Valores and S&P DJI's Total Mexico ESG Index. Participants in this index have shown a commitment to ESG as part of their ongoing decision-making, which has historically translated also into higher returns for investors.

Moreover, this year, we began Project Evergreen, an effort gear towards analytically defining the KPIs, target and action plans we need to continue to improve on all of our material issues. We plan to unveil these targets and initiatives later this year.

Finally, regarding our outlook for the remainder of 2021 and after a careful review of the factors that led Alpek to revise its guidance last quarter, the company once again has decided to provide updated guidance figures and key assumptions. Stronger-than-expected PET demand and margins as well as the onetime benefit generated in the Plastics & Chemicals segment by the polar vortex continue into the second quarter.

In the Polyester segment, Alpek expects the continuation of strong demand with Asian integrated margin now expected to average $300 per ton for the year and normalizing at $285 per ton in the fourth quarter. In the Plastics & Chemicals segment, the strength in polypropylene margins is also expected to continue late into August, increasing annual reference margins to $0.36 per pound.

Moreover, margins at the end of the year are also expected to be higher as the entry of production capacity last year was well absorbed by an increase in demand. Our new guidance figures are based on an average Brent crude oil reference price of $70 per barrel. For 2021, up from $63 under our previous guidance as demand for refined products has further increased without a corresponding increase in supply.

Based on these assumptions, guidance for overall comparable EBITDA in 2021 is now set at $765 million and $880 million for reported EBITDA as well -- as we still expect to end the year with a net positive inventory adjustment and carryforward effect. Guidance for CapEx is also being raised to $250 million to reflect the recent acquisition of CarbonLITE's rPET facility, which was only partially included in our original guidance.

Overall, volume remains unchanged as performance across both segments continues in line with our original guidance. As always, I would like to thank our team, customers and suppliers for another great quarter. I would also like to thank all of you for your attention today.

I will now turn the call back to Alejandro to open the webcast for your questions.

[Alejandro Elizondo, executive]

Thank you, Pepe. At this time, we will now move on to the Q&A portion of our webcast. [Operator Instructions] We will attempt to cover as many questions as time allows. Our first question comes from Luiz Carvalho with UBS.

[Luiz Carvalho, analyst]

Can you hear me?

[Alejandro Elizondo, executive]

Yes, we can hear you well, Luiz.

[Luiz Carvalho, analyst]

If I may, 3 quick questions here. The first one, if you can provide an update on Corpus Christi. So that would be great. The second one is, I mean, you reviewed the EBITDA guidance upwards. And as a consequence, that opens room for potential dividend. So I just would like to understand a bit more on the capital allocation front. And third, if you have data on Alfa restructuring and how this would impact potentially, I would say Alpek in terms to date, accident year to the company?

[Jose de Jesus Valdez Simancas, executive]

Okay. Well, good morning. First, on CCP, there's basically no news from what we have discussed or during the last meeting. The idea is to finalize all the effect free and ended contracts or beating contracts with different PCA companies to be ready to start construction early next year. So basically no change in what we have been mentioning before. Relative to CapEx well...

[Luiz Carvalho, analyst]

Capital allocation, yes.

[Jose de Jesus Valdez Simancas, executive]

Dividends, right?

[Luiz Carvalho, analyst]

Yes, capital allocation and dividends.

[Jose de Jesus Valdez Simancas, executive]

Yes. Regarding dividends, well, the -- the Alpek -- well, I mean, the Alpek and Alfa Board -- I mean it's more Alfa in this situation, but they will decide, I think, during the next couple of months, the amount of dividends that should be paid. And of course, a consideration will be made at the higher-than-expected cash flow results for this year. But we don't have yet a number that we could share with you.

And in terms of the Alpek spinoff, I think as we mentioned before, the spin-off is not necessarily something that we see in the very short term, it's a process that will take time. And again, on that, we don't have any new information to share with you.

[Luiz Carvalho, analyst]

And congrats on the results.

[Jose de Jesus Valdez Simancas, executive]

Thank you.

[José Pons, executive]

Thank you.

[Alejandro Elizondo, executive]

Our next question comes from the line of Ben Isaacson with Scotiabank.

[Ben Isaacson, analyst]

Can you hear me okay?

[Alejandro Elizondo, executive]

We got you, Ben.

[Ben Isaacson, analyst]

Great. So I have 2 questions. I'll ask them one by one, if I may.

First one, with the petrochemical cycle looking like it's near peak, investors are starting to focus more on those companies that can still deliver controllable EBITDA growth over the coming years. Some of the feedback that we've received recently on Alpek is that your leverage is very low and possibly falling further and perhaps limiting controllable EBITDA growth over the midterm, which could lead to investors switching out of Alpek into more growthy names.

Can you discuss the balance between funding a more aggressive growth strategy from the balance sheet versus the need to maintain an investment-grade credit rating?

[Jose de Jesus Valdez Simancas, executive]

Well, that is an extremely good question, which has not easy answer. I think for all, as we have mentioned, of course, maintaining investment grade has always been important. But when we have had opportunities or M&A in particular, that present themselves, and let me remind you of the acquisition of Brazilian assets back in 2018. We have made the -- we've taken the growth opportunities. We're confident that if anything, our leverage ratios will increase only in the short term. So while I do agree that at some point in time, there is a certain conflict that you have to balance both alternatives, opinion is, if we continue to find attractive growth opportunities, we will pursue those.

Of course, we're careful -- been very careful also with the leverage. So it could be a factor, but I do believe that -- and particularly now that we have such a strong balance sheet, I think we can accommodate both.

[Ben Isaacson, analyst]

Let me ask my second question. You've given updated guidance on 2021 EBITDA. Thank you for that. Now that we're more than halfway through 2021 the sell side, the buy side are starting to focus on 2022. Now I know it's a bit early to provide guidance right now, but can you just talk about how you see prices or margins, PET or PP developing in 2022. And really, what we're trying to figure out is what kind of EBITDA sensitivity should we be thinking about? I just see that EBITDA estimates for next year are all over the place. And it may do the company a disservice without some more guidance.

[Jose de Jesus Valdez Simancas, executive]

Well, I have to say that it is difficult at this point to make a forecast for 2022. But we believe that margins for most of the products and except for polypropylene, where margins have really been extremely high. I think margins in most of our other products will be very similar to this year or could even have an improvement. And let me explain a little bit.

On top of the cycle and everything, there is a factor that has been helping our margins that was not considered when we set the prices of the products at the end of last year for our contracts into this year. I'm talking particularly PET and prices for North America, which is by far our largest market. And that has to do with the freight rates, ocean freight rates. Ocean freight rates as you are all aware, have increased significantly over the last year. And again, in order for us to assess how the margins will look into this year, we do have to have a better feeling of freight rates again for 2022. But our expectation today is that this will allow at least again in PET, which is our largest product in North America. This will allow for an important increase in margins next year.

The improvement in margins that we have experienced in Asia this year have not been translated into higher margins for North America. They have been translated for higher margins particularly in our South American region. But in the largest volume, which is North America, they have not -- they were not, let's say, relevant this year. But hopefully, for next year, as I mentioned, even if margins in Asia go down a little bit, we still have the freight, the impact of freight in -- which could be quite considerable.

So again, we are optimistic -- I mean in terms of margins for next year for PET. We are neutral on EPS. In volume, in both cases, we are optimistic that we will be able to operate the plants at capacity. In both cases, Styrenics and polyester. In fact, we do hope that next year, we will be able to improve our production versus the existing year. We have had faced a lot of issues this year that should not repeated into next year. We have -- I think José Carlos mentioned briefly, the drought we experienced in Altamira, which took away a lot of volume. We have had a couple of shutdowns, some of them were unplanned. And so again, for next year, margins of PET, we see an improvement overall, not necessarily talking Asia, but overall, our margins in PET, we see them improving. Volume improving.

In EPS, margins neutral or steady, stable. The volume continues to be -- is strong. And the big question for us at this point in time is polypropylene. We see, again, the volume quite stable. But -- but in terms of margins, in case of polypropylene, yes, we do expect them to go down. But as we did mention also today, the level of supply-demand that we are expecting for North America 2022 relative to what we were seeing last year is much better. So I do believe that the margins will come down, but perhaps we'll be able to keep a reasonable margin.

[Ben Isaacson, analyst]

Can I just ask one more very quick question. When I -- you've talked about freight rates being a much more important story this year, and I see that. When I look at your asset portfolio, I could be wrong, but I believe outside of the Americas, you have the Wilton site. I'm not sure how many other plants you have outside. But does that mean that maybe you're going to look more towards investing overseas now to try and arbitrage out those high freight rates? Or are you still focused from an M&A point of view on the Americas?

[Jose de Jesus Valdez Simancas, executive]

Look, in reality, first of all, the freight rates, I think this might be an issue of couple of years, 1, 2 years, 3 years, perhaps, I don't see this as a long-term issue. So again, it's not like a strong enough reason to change our strategy. I would say that in general, even today, most of the markets we supply are supplied locally or domestically. So in that sense, the increase in freight rates is mostly helpful for our performance. Because in general, we price our products at the import party prices of these products coming from other regions.

So if the freights were to continue high. And I'm not saying I believe that, at least not for a longer period of time. But if they were to continue being higher, that would be helpful and allow us to improve our margins. But it does not have an impact in our decision-making in terms of M&A.

[Alejandro Elizondo, executive]

Our next question comes from the line of Nikolaj Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

Congrats on these incredible numbers. Three questions. One, molecular recycling versus mechanical recycling, you clearly hit the ground on the mechanical side and you're doing great progress. What is the current thinking with regards to molecular recycling initiatives within your organization or what you're seeing in the marketplace? So any kind of reflections on that would be highly appreciated, number one.

Number two, back to Corpus Christi and the new capacity, your growing volume head by about 8%. How would you feel if some of your partners there would not be prepared to push forward? Would you be interested in taking perhaps a larger stake in the Corpus and must increase your exposure to the virgin product?

And then finally, can you give us an update on the caprolactam business? And how, I remember you were facing some supply issues there. How is that doing? And again congratulations.

[Jose de Jesus Valdez Simancas, executive]

Thank you, Nik. Chemical versus mechanical recycling. Well, we -- I agree with you, mechanical recycling has, for the most part, being the largest route existing today. A lot of different technologies, different companies working very hard, investing a lot of money on the chemical recycling front. We are very close to some of them. We're very, very close to several of them. But the truth is that the chemical recycling has proven more difficult than what everybody expected. And I do believe that eventually there will be a process that will succeed. But it's going to take time. So that's why also we are active on the chemical part of the equation that risk chemical recycling.

We still believe that in order for us to satisfy our customer needs in 2025, we have to do that mostly with mechanical recycling. In the longer time frame, as I mentioned, I do believe, of course, chemical recycling will play an important role. Chemical recycling should be less sensitive to quality of bottles being used. So they have that advantage -- has that advantage. You can use a lower-quality feedstock, which is important because as you know, the biggest challenge today for recycling is getting the feedstock. I mean the feedstock is very limited. So -- and of course, with the right quality.

So as again, demand for used bottles continues to grow. I think the quality of the bottles of some of those -- the bottles that are left, so to speak, are going to be compromising quality. And that's when I think chemical recycling is going to be very important. But as I say, as far as we know, there are many good ideas. There are many -- a lot of people working pilot plants, but we have not seen really anything that will tell you, okay, this is the one technology that is going to leave this chemical recycling. So I think we still have to wait a little bit.

In the case of Corpus, yes, I hear your question about our partners don't wanting to proceed. Well at this point, we are not there. I mean, from what we know, all of the partners are interested in pursuing the project. I think with the performance -- the good performance of the demand on the PET side over the last months, I think, in fact, I could say most of us are more committed to the project in the sense that certainly demand is -- looks better. And whether one of the partners would not like to proceed, I think at this point, it's a very hypothetical question, Nik. We will consider that when it happens.

And margins for caprolactam, margins for caprolactam have been improving as of now recently. We have been operating our plant at relatively low capacity. Again, I assume you're familiar, but with this polar vortex that we experienced in February, there was a big dislocation in the prices of the raw materials. And in this particular case, benzene. Benzene normally has a certain relationship pricing that's in North America by its price of benzene in Asia. They are correlated, very similar prices perhaps with the difference in freight rate at the most.

During these past months, we saw a very, let's say, high difference, a very large difference which has kept us operating -- I mean, benzene prices being higher or significantly higher in North America. Again, as a result of the supply because of the polar vortex. So for that reason, we have operated the plant at low capacity. Last month, the prices became very much aligned, and this month, that is continuing. So we are increasingly the rates gradually of caprolactam. So that's the situation.

[Nikolaj Lippmann, analyst]

Okay. Can you share roughly the contribution you have from this product line in 2021?

[Jose de Jesus Valdez Simancas, executive]

You are asking caprolactam?

[Nikolaj Lippmann, analyst]

Yes.

[Jose de Jesus Valdez Simancas, executive]

Well, as I said, we have the plan down for most of the beginning of the year. So it's been relatively irrelevant.

[Nikolaj Lippmann, analyst]

Got it. So it could be a factor for next year. But so far this year, it just hasn't been done?

[Jose de Jesus Valdez Simancas, executive]

Exactly. So that's...

[José Pons, executive]

It's an upside.

[Jose de Jesus Valdez Simancas, executive]

You can see that as an upside.

[Alejandro Elizondo, executive]

Our next question comes from the line of Andres Cardona with Citi.

[Andres Cardona, analyst]

Congratulations for the results. I have 2 quick questions. The first one, let's say, 2021 has been a very unusual year, right? And so I wonder if you can remind us or like guide us about how should we think about minority interest, in particular, at the Plastics & Chemicals segment? And if you can flag if there is other relevant minority into this.

In particular, I would like to understand how much of the $270 million of the recurring EBITDA of the segment belongs to third parties.

And the second question is, if you may be able to provide some color about the assumption for fall polypropylene for 2021. And where are the [ margin ] for both polypropylene and integrated PET margins?

[Jose de Jesus Valdez Simancas, executive]

Okay. Look, you're asking the assumptions of polypropylene for 2021? For what we have in the guidance, you mean or?

[Andres Cardona, analyst]

For the new guidance, yes.

[Jose de Jesus Valdez Simancas, executive]

Okay. Well, let me transfer this call to José Carlos and.

[José Pons, executive]

So yes, thank you. basically, as you remember, we started the year with a very low expectation for margins in terms of polypropylene. The more we see the development, the margin is in the neighborhood of $0.18 per pound. We're actually expecting as Pepe said, it's -- today, as we speak, it's better than that. But as we see it on an average for the year and especially for the year-end, it will average out at around $0.18 per pound.

[Alejandro Elizondo, executive]

And I believe your second question, I'll just answer that one because it's a data point that's the minority interest within Plastics & Chemicals. So we have a JV on our polypropylene division with LyondellBasell. It is a 50-50 JV. And we have a JV with BASF in polyols, our specialty chemicals. So those are the only minority interest there. The one that has a little bit more relevance is Indelpro polypropylene, as polypropylene represents roughly half of our Plastics & Chemicals EBITDA depending on the year-end.

[José Pons, executive]

Thank you, Alejandro.

[Alejandro Elizondo, executive]

Our next question comes from the line of Leonardo Marcondes with Itaú.

[Leonardo Marcondes, analyst]

Can you hear me well?

[Alejandro Elizondo, executive]

Yes, we got you.

[Leonardo Marcondes, analyst]

My first question, maybe a follow-up from the previous question on the 2022 figures. Just try to get a stance on potential risks on margins for the next year. I don't know if you guys are seeing any capacity addition in the main markets for both PET and polypropylene that could likely impact margins next year.

My second question is -- my second question is regarding the recent acquisitions, the Alpek has made, right? For the Alpek position, it should start contributing with margin during the second half this year, right?

So I would like to know if -- if it is everything on pace with that. And also if you guys could share a little bit more on the contribution you guys expect for the CarbonLITE acquisition for this year and maybe next year?

[Jose de Jesus Valdez Simancas, executive]

Well, in terms of new capacity additions in North America, we don't expect any new PET or polypropylene capacity. The addition -- last addition we saw in polypropylene in North America was the Braskem facility that started off at the end of 2020. As I mentioned also during this presentation, demand of polypropylene in the U.S. this year has grown approximately 500,000 tons, I mean, for the year. And the new -- the new Braskem facility, the capacity 150,000. So pretty much what that is telling us is that the supply-demand balance should be very similar to what it was in 2020, okay?

So you could expect margins of 2020 -- too similar to margin 2020, just based on the supply-demand factor, okay? In case of PET, as I mentioned, there is no -- there is no new capacity. And I already mentioned that, in fact, we are short of capacity there until Corpus Christi starts up.

So again, and I mentioned also regarding margins of PET, we do believe that in PET, there will be an improvement in margins in North America. Polypropylene again, they will go back from the high -- very high margins this year from normal margins, similar to what we saw in 2020. That will be, at this point our focus, we will review this in more detail. And will incorporate that in lower guidance for 2022 later, but that's in general, how we see things.

Contribution M&A for CarbonLITE, okay. We -- I would say, at this point, it's very -- it will not be very relevant, let's say, over the next -- the next 3 to 6 months because we're just in the starting of pace. Once the plan is up and running and assuming everything is going well. We do believe the EBITDA will be $15 million, $20 million per year.

[Leonardo Marcondes, analyst]

Okay. Great. And for our NOVA acquisition is, it should start contributing with margins during the second half, right? It's everything on pace with that?

[Jose de Jesus Valdez Simancas, executive]

The NOVA acquisition, you mean?

[Leonardo Marcondes, analyst]

Yes, yes.

[Jose de Jesus Valdez Simancas, executive]

Well, actually, the NOVA acquisition has been accretive for us since the beginning of the year. In our original plan, the NOVA acquisition was going to actually, we were going to have negative EBITDA this first year, 2021, but we have had a positive EBITDA under the circumstances of the margins that we've been discussed. So again, we are having positive EBITDA, and we hope we will be able to improve that for the next year as we continue to reduce cost and increase volume, particularly in the specialty products of our sales.

The volume of our sales has been low this first half of the year. As a result, a tolling agreement that we have in Asia that has been on hold, which is just extend or renew lease agreement as of last month, so which we continue to see the improvement, starting in July. So EBITDA for next year should be better than what we experienced in 2021. And certainly much better than what we had anticipated in our original project.

[Alejandro Elizondo, executive]

Our next question comes from the line of Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

My question is regarding the -- if you can give us an update Pepe on the reason why Asian PET margins have remained so strong? And also what kind of visibility do you have that these strength in margins in spreads will reflect for your operations in North America for next year. I wonder if you are already in discussions with your customers regarding the negotiations for next year?

[Jose de Jesus Valdez Simancas, executive]

Look, Asian margins have been very strong this year. I hate to bring this up. But in reality, in Asia, you have to sort of look at 2 different margins. One is what we call the China margin, the margin in China. And that has been -- during the first half of the year, I would say, was stronger than expected. But right now, as we speak, that margin is pretty much in line with what we had in the guidance. It's around today's -- I saw it this morning, I think it was $220, $220, the margin in China, PET margin in China over Px and glycol. So margin in China, it was higher than guidance during the first half. Right now, it's similar. But for us, and particularly going forward, the margin that matters is not so much the Chinese margin or the margin in Asia. And the margin in Asia, traditionally it has been margin in China plus $30 to $40. So if in China, it's $220, $220, you would expect margin in Asia to be $250, $260.

Today, however, margin in Asia is more like in the $300 figure. So what we have experienced in Asia is the fact that China has become more separate from the rest of the countries. So now we have an $80 difference. And -- and we believe this might persist some time. And again, part of the reason of this difference has to do with the fact of the availability and cost of the containers in Asia and China, in particular. As containers are not available, our freight rates have increased so much.

So the prices of PET in Asia have also gone up in China, the -- in Asia have gone up and have become different from China. So this is something that is important. We have some of our contracts, let's say, with our customers. Some of them were based on China prices, and some of them were based on Asian prices. Going forward, I have to say that part of the important changes that we are doing for next year, we are going to move all of our contracts, and we're going to reference our contracts to Asian margins, not to China margins.

So that should be an important improvement for us going forward. Again, assuming that the difference between China and Asia remains at higher than usual levels, okay? So that's, that's important. But again, China has gone back to normal in terms of margins of PET. Asia remains higher than history because they have separated from the -- from the margins in China. And again, they can do that because they don't have the pressure of having to compete with Chinese products as a result of higher freight rates and less availability and particular reliability in terms of shipments. So hopefully, that gives you a more clear picture of what's happening with PET in Asia.

[Vanessa Quiroga, analyst]

Yes, Pepe, that's very clear. And the feedback from customers has been that this change is reasonable? The reference to Asian customers...

[Jose de Jesus Valdez Simancas, executive]

Customers are right now, Vanessa, as you can imagine, much more interested in reliability of supply than in $10 or $20 price difference. So yes, I think -- I think that all of these factors that I mentioned, is part of the reason that we feel confident that we will be able to get an increase in our margins in most of our customers next year. So it's the difference between Asia and China and, again, availability and cost of freight rates. In a way, the 2 go together. But that's -- the biggest change that is helping us, I would say, move forward will increase for next year.

[Alejandro Elizondo, executive]

Our next question comes from the line of Ricardo Rezende with JPMorgan.

[Ricardo Nasser de Rezende Filho, analyst]

Actually, a couple of follow-ups on my side. First one is on the NOVA EBITDA. If I'm not mistaken, a couple of conference calls ago, you had mentioned that the normalized EBITDA of these assets should be something around $20 million a year. So just given how those assets are performing, how close are you to those $20 million a year? Or do you see upside to that number?

And then the second question, also a follow-up is related to M&A. So you're mostly seeing you guys looking at the rPET assets in North America. How do you see the environment in Europe for those assets? Would be -- that's something that you would be looking at? Or the focus on rPET remains mostly in the U.S.?

[Jose de Jesus Valdez Simancas, executive]

Well, let me start with NOVA. I think NOVA as you mentioned I believe our equilibrium EBITDA, we will call it, was in the [ $15 million, $20 million ]. Remember that the CapEx for that asset was lower than $50 million, okay? So does it normalized EBITDA? We are not there yet. I would say we are a little bit more than 50% of that. In order for us to get there, as I mentioned, we need to grow a specialty part of the business and to continue to reduce costs.

Relative to M&A in Europe for rPET. I mean we are -- as I mentioned before, we are looking at opportunities particularly in U.K. We've, in fact, one of those opportunities we've been looking at is very much to relate it to a potential of chemical recycling. But nothing concrete yet.

[José Pons, executive]

On innovation, we're looking at opportunities in South America, where that something that could be complementary for us.

[Jose de Jesus Valdez Simancas, executive]

We're obviously, looking at rPET opportunities, particularly, I mean, in the places where we have customers of virgin PET, virgin PET to complement our offer. So that's right. In South America, and I would even say in Mexico, I mean, we're continually looking for opportunities.

[Ricardo Nasser de Rezende Filho, analyst]

Okay. No, very clear if I may, just a third question. sorry to bother you guys. But the JV with the Contour, I remember that you said that we should see an FID by the late third quarter. Does that remain the expected time line?

[Jose de Jesus Valdez Simancas, executive]

We are reviewing that project that we speak. We will give update probably for the next conference.

[Alejandro Elizondo, executive]

Our next question comes Luis Botello. He asks great results. How is the process of proactive cultural transformation taking shape in every country? And how do you see it enabling or impacting the positive result achievement in these difficult pandemic time?

[Jose de Jesus Valdez Simancas, executive]

Okay. Look, I think the culture is always a very important enabler of the performance of the company. I think that happens in general. In particularly for us we've embarked, particularly beginning of last year, a month actually before the pandemia started, we completely revisited our, I would say, our vision, mission and values, particularly trying to adapt the culture of the company, not a drastic change in culture, just adapt to be open to more innovation, more teamwork. And the idea of doing that, of course, is to avoid complacency in the behavior of our people. I think sometimes and particularly when you are successful, this becomes a big challenge. When you have been successful for several years, you sort of come happy with the results and stop looking for more.

So the biggest push in our effort to improve culture is what I'm saying is do not be complacent, to be in a way, always trying to improve what we're doing. And the ways to do that is by more innovation, by having more people in the company, participate with ideas. Innovation is not something that we can detect from a top up to the organization. It's not like you have 5 or 6 people that are very smart and can find ways to improve things. It's an effort that has to come from everybody.

So we're working very, very hard at making sure we improve our innovation process. And again, we've been doing this for the last 2 years. And again, together with innovation, the other important factor that we've recognized is that problems and challenges are more difficult every day and come from many different places. So for us to tackle those challenges in an effective way is much better if we can do that in groups, multifunctional groups. And that's why we're also very much working in improving the way we operate in teams. And those 2, again, factors in particular is something we -- we're working on a lot. And I think that's going to help us maintain the continuous improvement or transformational improvements in the company.

[Alejandro Elizondo, executive]

That was the last question we had today. Thank you for everyone for participating in today's webcast. Rest assured, we will follow up in e-mail if we did not get to your question and make sure to visit our newly redesigned website at alpek.com. Have a great day.