Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2023-Q2

[Antón Fernandez, executive]

Good morning, and welcome to Alpek's Second Quarter 2023 Earnings Webcast. I am Antón Fernandez, Alpek's IRO. And today, I'm glad to be joined by our CEO, Jorge Young; and our CFO, José Carlos Pons.

Let's start by reviewing what we will be covering today. First, Jorge will provide context for the quarter results and elaborate on relevant events; second, José Carlos will cover Alpek's second quarter financial performance; third, updated guidance figures for the year will be discussed; and afterwards, we will move on to Q&A.

Please note that the information discussed today may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to certain risks and 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 as a result of new information, future events or otherwise. I would like to remind everyone that this 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, Antón. Good morning, everyone, and thank you for joining us. I'll start off by highlighting that we have a comparable EBITDA of $201 million in the quarter and a significant improvement in free cash flow, reaching $216 million in the quarter, primarily from net working capital optimization.

Now let me provide some context for the quarter's performance. From an industry perspective, we're witnessing 2 particular factors. First, as China's economy continues to be softer than originally expected and with ocean freights back to historical levels, there is currently greater influence from Asian imports in the Americas, mainly for PET and EPS businesses. Second, North American feedstocks, such as paraxylene, maintain a disconnection versus Asian prices. We're taking actions to mitigate these effects.

Meanwhile, from a market perspective, consumers primarily in the Americas are moderating certain expenditures impacting the packaged goods, appliances and construction industries, thereby affecting purchases during what is normally the start of the peak season. These effects have led to lower-than-expected volumes. Notwithstanding, we are confident that our end markets will continue to be resilient.

Now let's review the reference margins for our core products. For polyester, Asian-integrated PET reference margins were 3% lower versus the previous quarter, averaging $332 per metric ton, in line with our expectation for the year. However, I would like to highlight that Chinese reference margins are becoming more relevant, particularly for our Middle East operations. These margins averaged $225 per ton, yet they closed at $203 per ton in the month of June as more Chinese supply has entered the market.

As new capacity in the region has been ramping up, polypropylene reference margins have stabilized, still averaging $0.17 per pound, in line with our expectations for the quarter. EPS reference margins have continued to normalize now with an average of $0.44 per pound, a 10% reduction quarter-over-quarter. And as mentioned earlier, reference ocean freight costs have returned to previous levels, resulting in a reduction of import parity pricing, which particularly impacts PET and EPS.

Moving on, I would like to highlight an important event that occurred just this week. Alpek is refinancing the outstanding balance from the 2023 bond during August with bank debt that includes $200 million sustainability-linked loan maturing in 2028. This represents Alpek's first transaction with an ESG component with key KPIs on carbon emissions and safety targets. We reiterate our commitment to all the targets we have established. Moreover, we have launched a project to our installed capacity to produce approximately 26,000 tons per year of EPS expandable polystyrene with recycled content in North America. This will be mainly focused on medical and electro domestic applications as well as major appliances.

The start-up is expected by the end of next year. At this point, José Carlos will review the financial results.

[José Pons, executive]

Thank you, Jorge. Hello, everyone. It's great to be here with you today. Let me go into greater detail regarding the quarter. Overall volume was 1.2 million tons, an increase of 3% quarter-over-quarter as the beginning of peak season partially offset other factors.

Comparable EBITDA was $201 million, which is a reduction of 3% versus the previous quarter, and there was a significant improvement in free cash flow. Now if we delve deeper into each segment, for polyester, volume was 984,000 tons, 5% higher quarter-on-quarter due to a slight demand recovery. However, it's still not at the levels we expected for the summer months.

While in Plastic & Chemicals, volume was 213,000 tons, a reduction of 4% quarter-on-quarter as demand across the portfolio was affected by lower consumer spending, as previously stated, and polypropylene dealing with a more supply in the Americas. However, we expect to regain some momentum in the second half of the year.

Moving on to raw material price dynamics. U.S. reference paraxylene prices increased by 1%, yet the disconnection between North America and Asian prices grew by 7% versus the previous quarter. This spread increased to $282 which led to imports arriving in Americas with more competitive prices.

In the Plastics & Chemicals segment, average reference propylene prices decreased to $0.40 per pound, a 20% decrease when compared to the previous quarter, primarily due to the recently-incorporated propylene supply in the region.

Switching over to the EBITDA breakdown. Overall comparable EBITDA was $201 million, 3% lower than in the previous quarter. As previously explained, we saw greater influence from Asia, which resulted in lower-than-expected volumes across our product portfolio, and a decrease in reference margins particularly for PET and EPS.

Reported EBITDA was $148 million, 21% lower quarter-on-quarter, and this result also included the following: a combined carryforward effect and an inventory adjustment of $40 million as raw material prices have decreased, a $13 million loss primarily related to a noncash hyperinflation effect in Argentina and a slight impact to our fixed and utility costs from depreciation of the Mexican peso.

If we take a closer look by segment, Polyester comparable EBITDA was $127 million, 4% lower versus the previous quarter. And in Plastics & Chemicals comparable EBITDA resulted in $70 million, a 9% decrease quarter-on-quarter.

In terms of free cash flow generation, CapEx totaled $75 million and was mainly allocated towards the construction of the Corpus Christi Polymers project and for a scheduled maintenance.

Net working capital investment was significantly improved by $284 million, achieved from a strong focus on managing inventories and collecting receivables. This figure significantly surpassed initial expectations for the year and resulted in a positive free cash flow of $216 million for the quarter and $186 million year-to-date.

Regarding the company's financial position during the quarter, Alpek's net debt decreased to $1.9 million (sic) [ $1.9 billion ] while last 12 months reported EBITDA was $827 million, which led to a leverage ratio of 2.3x net debt-to-EBITDA.

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

[Jorge P. Young Cerecedo, executive]

Thank you, José Carlos. In terms of guidance, we originally provided annual figures based on market conditions at the beginning of 2023. However, as the industry outlook has changed, the company now has a more conservative view for the second half of the year.

Regarding our assumptions, we expect Asian integrated PET reference margins at an average of $320 per ton. Although we did not provide guidance for Chinese PET reference margin, we're foreseeing figures below our original expectations for the year that will continue affecting our annual performance.

Considering Alpek's guidance figures, we are updating the following: Overall volume of 4.65 million tons, slightly below from previous levels due to the market conditions visible at the moment; a modified figure for overall comparable EBITDA of $770 million; net sales of $7.7 billion. CapEx is now set at $300 million as we continue to look for efficiencies in our investments.

Alpek remains committed to maintaining its financial stability and a prudent leverage for the company. As such, we don't expect an extraordinary dividend payment later this year. Additionally, we expect to continue with solid performance regarding free cash flow generation. Furthermore, we will continue progressing towards our long-term strategy, maintaining our competitiveness through cost improvement initiatives, footprint rationalization and continuing to evaluate optimizations of our portfolio.

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

[Antón Fernandez, executive]

[Operator Instructions] The first question comes from Leonardo Marcondes with Bank of America.

[Leonardo Marcondes, analyst]

So my first question is regarding the guidance. We saw that your expectations for PET remains unchanged. But was there any change in PP and EPS spreads in your forecast? My second question is regarding the working capital. The company released a good amount of working capital in this quarter, right? And according to you, it was due to several optimizations and improvements in inventory management. So I was wondering if you guys could provide a bit more color on this.

[Jorge P. Young Cerecedo, executive]

Leonardo, thanks for your question. I think in terms of the guidance, I don't think we did provide a breakdown by business. I think both of our businesses are facing similar influence from the current market conditions. So I wouldn't characterize that only one segment is influenced by the current market conditions. I think both of them and we didn't provide a very specific by business unit. But in general, both have some influence. And on working capital optimization, we did reduce the number of days outstanding of working capital, much closer to our target. I mean, we are very close to the target still, probably a couple of days above our target and we will continue to evaluate. But that's mainly the reason as markets were softer in the first half, we had been preparing our production plans for somewhat higher volumes and we naturally took the adjustments during the first half of the year, and they were more visible in the second quarter.

[Leonardo Marcondes, analyst]

Maybe just a follow-up from the first question here. I mean, was the decrease in the EBITDA guidance mainly due to volumes and also due to the FX appreciation we have been seeing over the past months and weeks or are the petrochemical spreads have also changed in your view for the remainder of the year for -- particularly for PP and EPS?

[Jorge P. Young Cerecedo, executive]

Yes. As I mentioned earlier, I think there is a combination of volumes below our original expectations for the year. And generally speaking, as we have in this year, in particular, more influence from Asia, I think there is some impact on our margins. So it's a combination of both. Now on the peso, a strong peso, yes, it also provides some headwinds for our results, it influences some of our cost in dollars, especially fixed costs and certain energy costs like electricity.

[Antón Fernandez, executive]

Our next questions come from Luiz Carvalho from UBS.

[Luiz Carvalho, analyst]

I have basically 2 from here. The first one is about capital allocation, right? I mean you basically reduced your EBITDA guidance for the year, maybe on the industry dynamics. You also, in a certain extent, trimmed the CapEx for the year. I mean Jorge already mentioned in the call that probably dividends in the second half will be lower than initially expected. So just trying to understand with this current dynamics how you're seeing the priorities in terms of keeping the investments/dividends. So just trying to get a bit more color on this. And the second, if I may, it's basically if you can provide a bit more update on the Corpus Christi development and maybe with regards to the new -- or this current industry dynamics, how you're seeing returns and the development of the project?

[Jorge P. Young Cerecedo, executive]

Yes, Luiz, thanks for your questions. Yes, I think we have slightly adjusted our CapEx. That doesn't reflect fundamental changes in our strategy. I mean we normally continue to optimize our capital expenditures. Sometimes it takes more time to prepare the projects. Right now, I think it's important also to be careful with our leverage. Right now, it's 2.3x but it will likely increase as we go through the year once we factor 12 months of the current EBITDA. And that's why working capital remains an area of focus. But as a company, we are very committed to keeping our leverage no more than 2.5x.

So I think we will have, again, some short-term pressure on that index. And that's why it's more appropriate right now to have a significant focus on the cash flow because we are, again, very committed to maintaining a very healthy financial ratios and that's pretty much the context of our decisions. On Corpus Christi progress, I mean, we continue to monitor the progress of the project. Nothing in particular to report that is different from our last quarter. And I think that project has -- we continue to watch it and follow up and monitoring the progress and expect it for some time in 2025.

[Antón Fernandez, executive]

Our next questions come from Sofia Martin from GBM.

[Sofia Martin, analyst]

I just wanted to know, would we be seeing an outstanding dividend for the rest of the year?

[Jorge P. Young Cerecedo, executive]

Sofia, I just mentioned that we -- at this moment, we don't expect the second or an extraordinary dividend for later in this year.

[Antón Fernandez, executive]

Our next questions come from Edward Palma from BICE Investment Asset Management.

[Edward Orlando Palma Sáez, analyst]

First of all, thank you for this presentation. I have 2 questions mainly related to CapEx and also the cash flows of the company. For the cash flows, I would like to know if you can talk about the higher feedstock that you mentioned in the press release. And for the CapEx question, it's about the physical progress about Corpus Christi.

[Jorge P. Young Cerecedo, executive]

Edward, thanks for your questions. On Corpus Christi, again, we don't report the very specific details of the progress of the project. As I mentioned, we continue to monitor its progress and we don't have significant updates from what we shared the last time. Right now, the time line remains for 2025. The comment -- the other part of the question on the feedstock. I think that's less related to working capital. I think that's more related as a headwind, we have currently in our competitiveness. And as I mentioned, I think we have concrete plans to start reverting those effects and normalizing. It will take some time. But that's -- I would say that's more an EBITDA impact rather than a material impact on cash flow.

[Edward Orlando Palma Sáez, analyst]

But the higher cost in feedstock is related to problems with the contracts that you have with the counterparties?

[Jorge P. Young Cerecedo, executive]

I think it's more related that the feedstocks in the North American market, where we have some of our supplies coming from. We have other sources of supply from overseas. But the ones in -- particularly in the North American market have additional cost pressures that are not experienced by other regions on alternative values for the feedstocks needed to produce paraxylene, which is the key petrochemical we buy. So that's the -- that's what we call the disconnect.

[Antón Fernandez, executive]

Our next questions come from Jean-Baptiste Bruny from BBVA. The questions comes from the Q&A function. So Jean has 3 questions. The first one is, at the end of last year, management was seeing a bottom cycle EBITDA of $1 billion or will be challenged by new guidance. We are aware that there are many moving parts, FX, volumes, et cetera. But can we see the $770 million level as the new cycle bottom? Second question is understand that you are mentioning CCP deployment and still expect a start-up in 2025 but can market current conditions could imply some delays? And the third question is related to OCTAL. I know you don't comment performance of acquired businesses. But if you could just mention if its performance since consolidation is in line, better or weaker than what we had been anticipating.

[Jorge P. Young Cerecedo, executive]

Okay. On the first question, yes, I think we would characterize the $1 billion perhaps as closer to mid-cycle. And I mean, today, based on some of the key variables that we follow, we think our number is closer to the lower end of the cycle. I think it will be very difficult to characterize what is exactly the bottom. But right now, I think we have some of the macro variables like the reference margins and especially the Chinese reference margins, the more recent issue on paraxylene disconnect, I would say, much closer to what we would call the bottom of the range that impacts us. And again, the $1 billion, I would characterize that more as a mid-cycle level or target that we still keep.

Nothing really to add on the Corpus Christi from what I just answered recently in the previous 2 questions. And on OCTAL, yes, we don't disclose those numbers specifically, but so far has been a positive performance on our system and very competitive asset, very committed people, and it's been delivering according to our original expectations. And the first year was significantly above because it was in the peak of the cycle, but even today still delivers above our expectations. It has, again, a reliable and very competitive operation and an outstanding feedstock position.

[Antón Fernandez, executive]

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 alpek.com. Thank you all for participating in today's Alpek webcast. Have a great day.