Alpek SAB de CV

BMV:ALPEKA

Earnings Call Analysis

Company Outlines Margin Recovery and Financial Targets

The company is observing some gradual recovery in Asian reference margins which retain a healthy differential above China markets. Margins have been unusually low, especially in China, and a recovery is expected later this quarter into 2024, becoming more noticeable by 2025. The management has optimized working capital by adjusting inventories to actual volumes and maintaining strong accounts receivable practices, leading to gains throughout the year. Despite a cautious CapEx spend this quarter, a slight sequential increase is projected for Q4. EBITDA guidance of $770 million will be slightly missed due to changing industry margins, and there will be somewhat lower CapEx compared to previous guidance. Net leverage is prioritized to maintain at 2.5x or less, although this quarter it was slightly higher at 2.6x.

Alpek's Third Quarter 2023 Performance Under Macroeconomic Influences

In the face of a challenging macroeconomic environment, influenced by China's economy, Alpek's third quarter of 2023 saw reference margins in key product areas like polyester and EPS decline. Although North American revenue margins for polypropylene remained stable, the decrease in PET margins, particularly in Asian and Chinese markets by 18% and 35% respectively, and a 58% decline in EPS reference margins due to cost surges, marked the quarter's trends.

Optimization Strategies Lead to Robust Free Cash Flow

Despite lower product volumes and declining EBITDA, Alpek's targeted efforts in optimizing working capital and careful capital expenditure management have culminated in an impressive $221 million operating free cash flow for the quarter. This achievement aligns with the company's strong commitment to cash generation and reflects disciplined financial practices.

Shifting Gears: Alpek's Strategic Decisions Amidst Cost Pressures

To navigate the ongoing inflationary challenges, Alpek has proactively shut down its filament facility and paused construction at the Corpus Christi integrated PTA-PET plant. These decisions aim to reassess project costs and timelines, demonstrating the company's adaptability in maintaining a solid financial stance while preparing for future resumption and growth.

Forecasting The Road Ahead: A Mixed Outlook

Looking forward, Alpek anticipates market conditions to persist with a slight improvement in Asian PET and EPS reference margins. Despite envisioning a marginally lower-than-expected performance, the company adjusts its annual guidance with a promise to uphold its dependable financial position via consistent free cash flow generation.

Dividends and Financial Prudence During Industry Headwinds

With the industry experiencing turbulence, Alpek's approach to dividends will be defined in early 2024, keeping in line with its historical practice. The company's strategy is to balance shareholder returns with the priority to maintain financial strength, especially when facing challenging industry conditions.

LatAm's Chemical Industry Recovery: A Prospective Timeline

While some chemical companies in Latin America forecast a recovery not before 2025, Alpek's executives hint at a potential gradual recovery in the polyester market starting later this quarter and possibly extending throughout 2024, reflecting a cautious but potentially earlier rebound from the industry's low margins.

Earnings Call Transcript 2023-Q3

[Antón Fernandez, executive]

Hi, everyone. Welcome to Alpek's Third Quarter 2023 Earnings Webcast. I am Antón Fernández, IRO, and here with us today, we have Jorge Young, our CEO; and Jose Carlos Pons, our CFO.

Let's begin by reviewing today's agenda. First, Jorge will discuss overall context of the quarter end results. Then José Carlos will cover Alpek financial performance, followed by recent events and outlook for the remaining of the year. And finally, we will open the call for questions from the audience.

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.

For your convenience, this webcast is being recorded and will be available on our website. Jorge, I will turn the call over to you.

[Jorge P. Young Cerecedo, executive]

Thank you, Anton. Good morning, and thank you for joining us. Let me start off by providing some context for the quarterly performance.

The macroeconomic environment we have experienced throughout the year remains, with China's economy impacting the petrochemical industry. In turn, the influence of Asian imports and Asian offers into the Americas persists, particularly for PET and EPS.

Meanwhile, regional market demand remains soft, affected by a high inflationary environment, which has deterred consumer spending, particularly for EPS. I would like to highlight that we have continued our focus on cash generation.

In Q3, we achieved a strong operational free cash flow of 221 million. As efforts to optimize working capital, CapEx and other elements continue to yield solid results.

Now let's discuss revenue margins for our main products. For polyester, Asian integrated PET reference margins declined by 18% quarter-on-quarter, averaging $272 per ton, slightly below expectation.

Meanwhile, Chinese integrated PET reference margin averaged $146 per ton, declining by 35%.

For polypropylene, due to the supply and demand dynamics in the region, North American revenue margins remained flat, continued to average $0.17 per pound as expected.

And for EPS, North American reference margins averaged $0.19 per pound, 58% lower quarter-on-quarter primarily due to higher raw material prices and a lack in EPS reference prices.

Now, José Carlos will review the financial performance.

[José Pons, executive]

Thanks, Jorge. Hi, everyone. It's great to be here with you.

To begin with, I'd like to discuss this quarter's financial highlights. We achieved overall volume of 1.2 million tons, and a comparable EBITDA of $160 million. Our gross free cash flow generation resulting mainly from the net working capital improvement and a CapEx optimization.

Now let's look at the results by segment. For polyester, volume was 955,000 tons, 3% lower quarter-on-quarter, partially due to Asian imports in the Americas and soft demand in the region.

In Plastics and Chemicals, volume was 222,000 tons, an increase of 4% versus the previous quarter.

We saw overall higher polypropylene demand in the quarter, and particularly lower demand in the EPS from the construction industry in the U.S.

Moving on to key feedstock dynamics. The U.S. reference Paraxylene prices increased by 8%, with the disconnection between the North American and Asian prices growing by 20% to $339 per ton.

In the Plastics and Chemicals segment, average reference propylene prices decreased to $0.36 per pound, a 10% decrease quarter-on-quarter, yet rising in September to $0.39 per pound.

Meanwhile, average reference prices for styrene rose to $0.53 per pound, an 11% increase compared to the second quarter, with greater disconnection between North America and Asian prices.

In terms of EBITDA breakdown, overall comparable EBITDA was $160 million, 21% lower than in the previous quarter. This was mainly due to a decrease in reference margins and higher future costs, particularly for PET and EPS.

Reported EBITDA was $126 million, 50% lower quarter-on-quarter, which includes the following: an $18 million onetime loss related to the filament facility shutdown costs, and noncash hyperinflation effect in Argentina, as well as, to a lesser degree, a combined positive carryforward and inventory effect of $1 million.

If we take a closer look by segment, Polyester comparable EBITDA was $114 million, 11% lower versus second Q. And in Plastics and Chemicals, comparable EBITDA was $42 million, a 40% decrease quarter-on-quarter from lower reference margins in EPS and raw material prices rising for polypropylene towards the end of the quarter.

Regarding free cash flow generation, CapEx totaled $38 million, mainly due to maintenance. Net working capital investment improved by $214 million, which continues to surpass our initial target for the year and resulted in a positive operating free cash flow of $221 million for the quarter, which quarterly represents $407 million year-to-date.

Considering the company's financial position, Alpek's net debt decreased to $1.7 billion, while last 12 months reported EBITDA was $646 million, which led to a net debt-to-EBITDA ratio of 2.6x.

I'd like to affirm that Alpek remains committed to leverage levels below the target of 2.5x. It is worth mentioning that if we were to exclude both the filament side and the Cooper River shut down from the first quarter, there'll be a leverage ratio of 2.3x.

And finally, in terms of financial performance, let me take a moment to highlight our healthy debt profile, which offers us flexibility for the future. During the quarter, we announced the successful refinancing of the outstanding balance from the 2023 bond that was due in August with bank debt. This includes our first ever ESG sustainability-linked loan, a $200 million facility maturing in 2028.

Additionally, we currently have over $500 million in available cash and available committed credit lines of over $600 million.

Thank you for your attention, Jorge. I'll turn back the call to you.

[Jorge P. Young Cerecedo, executive]

Thank you, José Carlos.

As part of our strategy to mitigate the current environment, we are focusing on maintaining our competitiveness and financial strength. With this in mind, the company made challenging decisions.

First, Alpek decided to shut down its filament facility located in Monterrey, Mexico, and will not be substituting production. The site have an installed capacity of 100,000 tons of textile grade polymer and filament.

As you know, Alpek continually seeks value creation opportunities by streamlining operations to meet the demands of the competitive markets its companies service, aiming to safeguard our financial strength. Therefore, and while this was a difficult decision to make, we have opted to close these operations.

I would like to take a moment to express my heartfelt gratitude to each of the employees of this site for their commitment to the company throughout the years.

Second, Alpek, along with its joint venture partners of Corpus Christi Polymers, decided to temporarily pause construction of its integrated PTA-PET plant in Corpus Christi, Texas, as high inflationary rates have led construction and labor costs to surpass original expectations. By doing so, in the following months, the CCP Board will assess options to optimize the project cost and time line and will announce in a timely manner.

Alpek remains committed to maximizing value for CCP and this site will be properly preferred so that construction may resume in the future.

Moving on to ESG. In September, we reinforced our commitment to gender equality by pledging to the women's empowerment principles from the UN Global Compact and UN women. We will continue to diversify our workforce through strategic hiring, retention and organizational development. We are confident that having greater diversity and a variety of perspectives will positively impact our business.

Looking ahead at the remainder of the year, Alpek envisions similar market and industry conditions with a slightly lower-than-expected Asian PET reference margins, both with Chinese PET margins will be seeing recovery from the levels at the end of the third quarter. We also expect some recovery in EPS reference margins.

In terms of annual guidance, volume is expected to remain in line. At this time, comparable EBITDA and CapEx are expected to finalize slightly below revised figures.

We aim to preserve and strengthen our solid financial position through various efforts to guarantee free cash flow generation, which we foresee closing the year, surpassing our initial target.

On a final note, I'd like to mention 2 organizational updates. Alejandro Llovera, previously President of the Polypropylene business will assume the position of President to the Polyester business. And Alejandro [indiscernible], previously commercial Vice President of the Polypropylene business will assume the position of President of our Polypropylene business. Both of these changes will be effective as of November 1. I wish them both success in their new positions and responsibilities.

Thank you, everyone. Anton, please proceed with Q&A.

[Antón Fernandez, executive]

Thanks, Jorge. At this time, we will be receiving your questions. If you ask your questions live, please raise your hand. We'll call on participants in the order they appear. You may also type your questions through the Q&A function. We will attempt to cover as many questions as time allows.

Our first question comes from Tasso Vasconcellos with UBS.

[Tasso Vasconcellos, analyst]

I had 3 here on my end. The first one on CPP. There's a second time [ indiscernible ] investment in the project, right? So it would be great to hear from you what are the main triggers that would make the company resume investments? Is it PET chem prices? Is it the cost structure, as you discussed previously today? Is it that greater visibility on the future of the industry? That would be my first question.

The second one, the company did a great job in optimizing cash flow in the quarter despite the challenges faced in the industry. And looking forward, what are the main goals here? Where do you see greater opportunities to continue with this optimization either in working capital or CapEx and so on?

And third, how should we think about dividends? I mean this is an are of the tougher in the industry on one side, but the company being able to maintain a solid cash flow, as based on the release here today, we also see a comfortable debt profile. So that would be my 3 questions.

[Jorge P. Young Cerecedo, executive]

Tasso, on the first question about Corpus Christi Polymers. Yes, this is the second time the project has been put on a pause. The first time was from the previous ownership before going to the bankruptcy, then it took a while to put the project in a position to be ready to resume construction and that happened last year.

And yes, we will need to get more comfortable with our ability to manage the project execution and contain the costs and certainly other factors that you mentioned, like visibility on the industry are also considerations. But first and foremost, thjs -- or the company's ability to have an adequate project management.

Second, on your question about cash flow and further optimization. I think our working capital optimization has been significant this year. I mean, we have reached very close to our target levels of working capital. We might still have some other opportunities to pursue in our final optimization of working capital. And as of now, we will maintain very strict discipline on projects. We have a list of projects that are attractive in the pipeline, but the time for them to come in the market, we will review those carefully to preserve our financial strength.

The last question, your question was about dividend? Or could you repeat the last question?

[Tasso Vasconcellos, analyst]

Yes, yes, sure. The last question was on dividends because we are seeing a tougher industry environment, right? But the company has been able to maintain a solid cash flow. And based on the release year-to-date, the company has a very comfortable debt profile in the next year, right? So how should we think about dividends amid this tough environment on site, but the company being able to maintain a solid cash flow on the other side?

[Jorge P. Young Cerecedo, executive]

Yes. I think we -- normally, our dividend definition comes early in the calendar year. So as we have known over the last several years, it's going to be in the first quarter when we will define the dividend at each level. So we'll communicate that accordingly, I think. It's important for us to preserve our financial strength and because that's one of our priorities, to provide protector rating and provide our shareholders with a dividend as well.

So that definition will come in the first quarter. So even though industry conditions are challenging. I mean, that definition is going to be made in the year 2024.

[Antón Fernandez, executive]

Our next questions come from Leonardo Marcondes with BofA.

[Leonardo Marcondes, analyst]

I have 2 questions here from my side. The first one is on the PET integrated margins. Well, we try to follow spreads here every month. And we saw that this reached the bottom in the year during September, right? So in this context, could you provide a bit about your view on how do you see these margins going forward for the remainder of the year and also for next year?

And my second question is regarding the working capital, right? You did a very good job made an increase in feedstock price during this quarter. So could you provide a bit more color on what measures have led to a such gain in working capital?

[Jorge P. Young Cerecedo, executive]

Yes. So integrated PET margins, especially the ones we track and follow and report on China, I mean it's sort of view and belief that those have reached bottom and we would expect some gradual recovery as going forward.

We expect the non-China -- the Asian reference margins to retain, I would say, a healthy differential above the China markets. Yes, we will expect some gradual recovery as we go along. But the level, I think, is still premature to define very, very precisely.

I think in the question about working capital, I think we have optimized our inventories. I mean, we -- last year, we were coming from stronger volumes, and we have prepared this year for somewhat better volumes compared to the ones that actually turned out to be. So we had an opportunity to reduce our inventories. And I think we have been also quite sharp on keeping all our accounts receivables on within the expectations for timely collection, and we have worked well with our supplier base to have competitive terms. But it's been focusing [ or in our ] inventories has led the gains throughout this year.

And as I mentioned in the previous questions, we might still have some further opportunities to fine tune the level of working capital.

[Antón Fernandez, executive]

Our next questions come from Andres Cardona with Citi. Andres.

[Andres Cardona, analyst]

Following on PT margins, I just want to understand how sustainable is for the Chinese margins to stay at these low levels that seems below the cash cost?

And if the recovery that you are seeing on the rated PET margin has to do with oil prices rally or what is driving the recovery?

Perhaps the last one [ indiscernible ] margin is, we are nearing end of the year, where you guys usually negotiate, on next year contracts, right? So it will happen in an environment of very impressed margins. How to think about these contracts? And can you remind us how much you usually typically contract in terms of volumes for the year after? And if maybe, this low environment may, I don't know, make you more willing to have more exposure to the spot?

[José Pons, executive]

Yes, Andres, I'll answer the questions. I think current PET margins, especially those in China, I think we concur with your view that those are below the cash cost and. We think it's a matter of time before they have to revamp. And again, the timing and the level is still to be [ determined ].

I think the oil price is a variable, but for the most part, the petrochemical chains tend to pass through eventually the oil price, and it becomes more an event of supply/demand within -- with each respective product.

So I think, oil is a secondary variable in the spreads. Yes, very high oil prices could perhaps delay some of the margin recovery, but I think it's a secondary variable in impact.

As far as our contracts and exposures, I mean, we have a mix of already in the company where we have exposure to the global margins depending on all regions, right? I mean some regions like South America and most of the PET we sell from the Middle East are traditionally more exposed to the Asian market prices.

North America is more structured with contracts. Some contracts are multiyear. Some contracts have already been settled for next year, and some contracts we are in the middle of negotiating period.

So I guess in that case, it's -- there is some diversification on our approach to the market.

[Antón Fernandez, executive]

Our next question comes from Jonathan Lopez from [ ICIS. ]

[Unknown Analyst]

Can you hear me?

[Antón Fernandez, executive]

Yes, perfectly well.

[Unknown Analyst]

Jonathan from ICIS, the LatAm correspondent. So I keep hearing chemical companies in Latin America saying that the recovery will not really arrive anywhere before 2025. Some of them say, beginning of '25, some of them say mid '25 to the CEO.

When do you really think chemicals globally will recover?

[Jorge P. Young Cerecedo, executive]

I mean it's a good question. I guess -- in the case of Polyester, which is one of our key products, again, I see maybe 2 steps. I think the margins went probably too low, especially on Chinese margins. And we would expect again some gradual recovery to happen later this quarter or throughout 2024.

And -- but to what extent they recover and when they become, I would say, more average margins or above average, that might take a little longer, perhaps as you mentioned, till 2025, but we would expect some sequential recovery fairly soon because they just went too low.

Similar case with EPS, I think reference margins in EPS have grown very low in Q3, and we would expect some treasure recovery in the following quarters. And for Polypropylene, we will expect more flat margins this quarter and maybe recovering towards the latter part of next year.

[Antón Fernandez, executive]

Our next questions come from [ Alejandro Andrade ] from JPMorgan.

[Unknown Analyst]

My question was on CapEx because we obviously saw a big drop in terms of the cash CapEx that you spent in the quarter. I know you have guidance, so that would indicate that theoretically, you should increase investments next quarter. But I'm just wondering if you're just trying to be more disciplined with CapEx overall, and if we should expect actually this low pace to continue into the fourth quarter?

[Jorge P. Young Cerecedo, executive]

Yes, certainly, we are very disciplined right now with our CapEx decisions. I think in the Q4, we will see some increase compared to Q3, because in Q3, we spent relatively little amount of money in Corpus Christi and even though we have paused the project.

In Q4, we will see some of the expenditures needed from Q3 and to demobilize the project. So that will happen in Q4. And we have other CapEx will pan out in Q4 and expect some sequentially increase in Q4 relative to Q3.

But in 2024, you may expect to see something closer to the pace of Q3, or we have a pipeline of attractive projects that we'll bring into the equation when we feel good about the prospects and the strength of the balance sheet. We don't want to again compromise our balance sheet. And in due time, we'll bring more projects into the question, for sure.

[Antón Fernandez, executive]

We have a questions from the Q&A function. And the question reads, can you confirm your EBITDA and net leverage guidance?

[Jorge P. Young Cerecedo, executive]

Yes, our EBITDA guidance that we came up a few months ago, was for $770 million on comparable EBITDA. So we have -- as we mentioned earlier, we expect to be slightly below that level because of the evolution in industry margins. We will also be somewhat below our last guidance in CapEx. And I can say that, is that -- anything else on the question?

[Antón Fernandez, executive]

That was it, yes. And the net leverage?

[Jorge P. Young Cerecedo, executive]

Yes, net leverage. I mean, we are again -- it's one of our priorities to remain at 2.5x or less. This quarter, we were at 2.6, and we might see a very slight increase in Q4. But again, we expect to be as soon as possible within our target range of 1.5 to 2.5.

[Antón Fernandez, executive]

Thank you. That was our last question in the queue. You will find both a recording of this webcast, as well as a transcript at alpek.com. Feel free to contact us directly for any additional information. Have a great day.