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Good morning, everyone, and welcome to Alpek's Fourth Quarter 2017 Earnings Conference Call. With us this morning we have from Alpek, José Valdez, CEO; Eduardo Escalante, CFO; and Hernán Lozano, IRO, who will discuss the company's performance and answer any questions that you might have. As a reminder, today's conference is being recorded and will be available on the company's website, www.alpek.com.
I will now hand the call over to Mr. Lozano. Please go ahead, sir.
Thank you. Good morning, and welcome. We very much appreciate everyone's participation today. This call will be divided into 2 parts. First, Mr. Valdez, our CEO and Mr. Escalante, our CFO will provide a general overview of Alpek's 2017 performance and the outlook for 2018. Afterwards, we will have a Q&A session.
Before we get started, let me remind you that the information discussed in today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions 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 will now turn the call over to Mr. Pepe Valdez.
Thank you, Hernán. Good morning, everyone and thank you for joining us today. 2017 was an eventful year for Alpek. I will focus on 4 key event that we engaged in last year and are still ongoing as we enter 2018.
First is the PetroquĂmicaSuape and Citepe acquisition in Brazil; second is the M&G restructuring process; third is the sale of our cogeneration power plants in Mexico; and forth relates to the PET antidumping cases in the United States and Canada.
It has been more than 18 months since we first announced our interest in PetroquĂmicaSuape and Citepe. Finally, last week, we obtained the required regulatory approval from the CADE court in Brazil to acquire both companies from Petrobras. The next step in the approval process is for CADE to issue its final certificate, which is expected by the end of February following certain regulatory terms. After that, Petrobras will have up to 60 days to meet all their conditions precedent required to close the transaction, such as clearing all outstanding debt from both companies. Hence, closing this expected to occur between April and May. This transaction represents an important milestone for our footprint in the Americas and will provide synergies that reinforce our company's integrated Polyester platform. We very much look forward to finalizing this deal and working together with the PetroquĂmicaSuape and Citepe teams to much realize the assets' full potential.
The second event is the M&G restructuring process, which impacted our business significantly during the third quarter of last year. We have acted decisively to maximize restitution and long-term shareholder value, first, by holding PTA supply to keep our exposure from growing; then, by recognizing full provisions and impairments in third quarter '17; and finally, by taking on a relevant role in M&G's ongoing restructuring process. The M&G restructuring process is moving forward separately in different geographies. We hold claims in Mexico, United States and Brazil, and our priorities vary by region. The first order of business was to support a restart of M&G's profitable PET operations in Mexico. In October, we acquired, from Inbursa, all credit rights to $100 million secured loan with M&G Mexico to enhance our position as the only secured creditor in this process. This loan is secured by a first lien on M&G Mexico PET production plan in Altamira, which is located next to our largest PTA plant. We engaged M&G and its creditors to tailor an appropriate solution for all parties[indiscernible]. In November, M&G Mexico resumed PET production under a temporary tolling agreement with Alpek, whereby we supply the required PTA plus all their feedstocks and pay a tolling fee in exchange for PET from M&G's Altamira facility that is then sold directly to customers. The tolling agreement was complemented in January by a secured credit facility through which Alpek will provide up to $60 million subject to certain conditions. This financing is secured by a second lien on M&G Mexico's PET production plant in Altamira and will be disbursed in tranches. $30 million have been funded so far.
The combination of tolling and credit agreement is intending to support M&G Mexico's PET operations, while a definitive restructuring plan is presented and approved by Alpek and other creditors. We have 2 priorities in mind, as we navigate M&G Mexico restructuring process. On the one hand, maximize the recovery of our claims and maintain PTA's supplies to the restructured entity.
In the United States, M&G USA Corporation filed for bankruptcy in Delaware and received approval to begin the sale of certain assets including the Corpus Christi plant. The ongoing bidding process is expected to conclude in March with a sales hearing in court. Alpek's priority in M&G USA's restructuring process is to reaffirm its Corpus Christi capacity right under the original agreement or as a [indiscernible] bidder for the Corpus Christi asset. Other than the fact that we are actively engaged in this process, there is few information that we can disclose prior to the hearing. We will provide updates as this process advances.
In Brazil, M&G PET operations are running at lower rate than normal. However, we continue to supply PTA on a cash-on-delivery basis while a definitive solution is implemented.
We feel confident of our position as a secured creditor and key supplier in any M&G restructuring scenario. Alpek is fully committed to maintaining an active role in this process to fulfill its priorities.
Next, in the list of key events is the sale of our 2 cogeneration power plants in Mexico. Following an exhaustive selection process, we chose ContourGlobal to conduct confirmatory due diligence and negotiate final agreements to sell 100% of our Cosoleacaque Altamira cogeneration power plants. ContourGlobal was recently listed on the London Stock Exchange as an international power generation company with approximately 4,100 megawatts in operation in 19 countries.
Alpek and ContourGlobal are working diligently to fulfill all the internal and regulatory requirements needed to finalize the transaction. Timing is depending on this essential part of the process, which has advance regularly for a potential closing in coming months. The economic terms have been determined and we -- will be discussed upon signing of the final agreement. We have discussed the relevance of this initiative in the past both as an alternative source of funding for a strategic investment and as a catalyst to unlock value for Alpek's shareholders.
The fourth key event relates to the PET antidumping cases in the United States and Canada. During the fourth quarter, the U.S. Department of Commerce initiated its investigation, and the U.S. International Trade Commission issued a preliminary determination of material injury caused by PET imports from Brazil, Indonesia, Korea, Pakistan and Taiwan. Based on the case's estimated dates, preliminary duties could be imposed during the second quarter, and final determinations could be issued in the fourth quarter.
On the other hand, the Canada Border Service Agency imposed preliminary duties ranging from 22% to 77% on PET imports from China, India, Oman and Pakistan. Final determinations are expected as soon as this month. The progress in both, like, cases is encouraging, as we seek to address market distorting, dumping and subsidization.
On the other front, we are pleased to see these 4 key events moving in the right direction. The long-term prospects in each of these areas are worthy extraordinary effort our team is making to achieve the resolutions that are in Alpek's best interest.
Moving onto our business overall performance, volume, sales and CapEx were virtually all in-line with our original 2017 guidance. In contrast, EBITDA was significantly below due to the M&G restructuring process both at the write-off of receivables and also the reduction in volume during the third and fourth quarter, the volume in PTA sales.
Adjusting for the negative effect associated to this event, 2017 EBITDA was better-than-expected, driven by our Plastics & Chemicals segment. On the macro front, the oil and feedstock prices environment shifted favorably in the second half of '17 and has been much stronger than we anticipated.
In addition, we start to see reference polyester margins in Asia have been recovering during 2017, supported by a gradual improvement in operating rate for 2 consecutive years, as demand growth continued to outpace incremental capacity.
Our strategic CapEx program reached another important milestone with the startup of 2 new projects in 2017. The propylene storage spheres and the expandable polystyrene capacity expansion in Mexico. The spheres will enhance our propylene supply capabilities, and our Mexican EPS plant is now among the top 5 largest in the world.
Also, the 350-megawatt cogeneration power plant that is being built in Altamira is on track for a start-up before year-end 2018. We have disbursed approximately 80% of the total investment so far.
On a final note, it was good to see such a rapid recovery in our business during the fourth quarter. We expect a similar level of performance to be sustained throughout 2018, which also has the potential to be transformational year for Alpek as we advance on other fronts.
At this point, I would like to turn the call over to Eduardo.
Thank you, Pepe, and good morning, everyone. 2017 volume, sales and CapEx were all within a range of 3% from our full year guidance. However, 2017 EBITDA was well below due to the M&G restructuring process, which resulted in a $130 million provision for accounts receivable and a 2-month PTA supply disruption to M&G, our largest customer.
Adjusting for the negative effect directly related to the M&G situation, EBITDA was above guidance, as [ subpar ] Polyester EBITDA was more than offset by Plastics & Chemicals. For the full year 2017, Polyester sales were up 8% and volume was 3% higher than in 2016, driven by the integration of Selenis Canada and organic PET volume growth in all the regions.
2017 Polyester EBITDA was $147 million including the M&G accounts receivable provision, a $40 million noncash inventory gain and a $12 million onetime gain from the Selenis Canada acquisition.
Adjusting for these nonoperating items, Polyester EBITDA was $234 million, down 29% versus 2016, affected mainly by lower PET margins, the M&G PTA supply disruption and higher isophthalic acid price.
Isophthalic acid, also known as IPA, is the secondary feedstock that is using PET to enhance its clarity and bottle-making productivity.
2017 Plastics & Chemicals sales grew 8%, as higher average prices were partially offset by a 3% volume decrease. Volume reflects lower [indiscernible] supply of polypropylene, ethylene oxide and ammonia.
For the full year, Plastics & Chemicals EBITDA was $237 million, including an $8 million noncash inventory gain. Hence, comparable Plastics & Chemicals EBITDA was $229 million, down 26% versus 2016, which benefited from record polypropylene and EPS EBITDA. Nevertheless, Plastics & Chemicals EBITDA was 15% above guidance supported by better-than-expected polypropylene and caprolactam margins.
Moving down on the P&L, our bottom line includes [ full ] provisions and impairments associated to the M&G restructuring process.
In accordance with IFRS, we've recognized the following nonrecurring items: a $130 million provision for accounts receivable impairment, which affected EBITDA; a $435 million intangible asset impairment associated with Alpek's capacity rights in Corpus Christi, which affected operating income or EBIT; a $95 million financial asset impairment associated with a loan granted to M&G, which affected financial cost net; and a $158 million deferred tax, which benefited income tax.
This line item was adjusted $65 million lower versus the third quarter to reflect the recent reduction in the U.S. corporate tax rate. As a result of an aggregated M&G-related impact of $481 million to majority net income, we posted a loss of $390 million. Adjusting for the nonrecurring M&G items, 2017 majority net income was $162 million compared to $198 million in 2016.
Regarding our balance sheet and cash flow, we have a strong financial position that is supported by positive cash generation. At the close of 2017, net debt was $1.3 billion, up 21% or $221 million versus 2016. CapEx of $236 million, which was invested primarily in a strategic project. Approximately $101 million in M&G secured credit rights acquired from Inbursa were partially offset with cash from operations.
In terms of liquidity, our cash balance was $484 million at the end of 2017. Additional funding is available through unused credit lines. Our net leverage ratio increased to 3.3x, mainly due to the M&G provision that affected EBITDA.
Adjusting for the $130 million nonrecurring charge, net debt to EBITDA was 2.5x and interest coverage was 6.2x. Credit metrics will continue to reflect the M&G provision during the next 2 quarters. However, we expect an immediate step-down after that.
Finally, I would like to share some insights on our view for 2018. Our 2018 estimates are based on an average Brent price of $57 per barrel compared to a $54 average in 2017 and the current price of $62 per barrel. As a reference, we use an exchange rate of MXN 19.25 per U.S. dollar and assume a moderate improvement in GDP growth versus 2017 for Mexico and the U.S.
Another important aspect about our 2018 guidance is that we excluded all extraordinary events that have yet to be resolved such as the acquisition in Brazil and the sale of our cogeneration power plants. Relevant information associated to such events is not yet subject to disclosure and timing is a key variable to assess their potential impact.
Updates will be provided in due course. For 2018, we expect sales to increase 3% year-over-year, supported by volume growth of 3% coupled with a slight uptick in oil and feedstock prices.
Consolidated EBITDA is expected to reach $569 million, up 48% versus 2017 and 23% higher than comparable EBITDA of $462 million in 2017. The improvement reflect the return of our Polyester segment's EBITDA back to its 2016 level following the M&G disruption and multiyear low PET margins in 2017. A stable M&G Mexico PET plant operations were considered for the 2018 guidance.
For the Plastics & Chemicals segment, we anticipate a 2% decrease in EBITDA, mainly due to our polypropylene business. Underlying reference polypropylene margins are firm, but our propylene supply mix is expected to shift further towards imports.
Lower refinery operating rates in Mexico have translated into lower domestic propylene production. Consolidated 2018 CapEx is estimated to be $167 million for both maintenance and the strategic projects.
The last tranche of the Altamira cogeneration power plant will be the largest organic investment of the year. 2018 CapEx excludes the $385 million payable to Petrobras upon closing of the PetroquĂmicaSuape and Citepe acquisition as well as potential CapEx related to the M&G restructuring process.
Regarding dividends, we will not propose a dividend payment in our upcoming shareholders meeting. We believe it is in our shareholders’ best interest to decide on this year's potential dividend payout once we have more visibility around the ongoing extraordinary events.
Our base 2018 guidance excluding all extraordinary events results in positive free cash flow generation and a net leverage ratio of 2x at the close of the year.
Regarding the ongoing extraordinary events, a 2018 scenario in which we close the Brazilian transaction as well as the cogeneration sale, would be cash positive for Alpek, providing ample flexibility for potential CapEx investments related to the M&G restructuring process and for dividend.
This concludes my remarks and now I would like to open the call for questions.
Operator, please instruct the participants on how to place their questions.
[Operator Instructions] And we'll go first to Nikolaj Lippmann with Stanley Morgan.
Three questions, if I may. First, on corporate, could you provide any color on your preference, vis-Ă -vis, sort of, getting your money back or co-investing with a partner in that project? And how about if you have submitted any CapEx that you are prepared to spend as you co-invest in projects in the restructuring filings? So that's number one. Number two, how should we think about -- as the consolidation seems to be happening across the region, how should we think about anti-trust issues? And particularly, in the U.S., is there anything that you are doing to address that? And finally, any comments that you could provide -- it looks like your spreads in the PET business are right back up, but anything you can provide in terms of IPA, the price action there and whether that's been included now in most of your formulas?
Okay. Well, Nikolaj, first related to Corpus. In Corpus Christi, our intention -- as I did mention on the call, it'll be to maintain our capacity reservation as is. We don't know if that's going to possible. That's a possibility the bidders can opt for that option to buy the plant and continue providing -- honoring the capacitors reservation. So that's one possibility that is in way -- in a certain way, outside of our control. But so far, we are preparing to do in case of Corpus is to do a bidding, not necessarily for the full plant, we are looking to -- as I mentioned, to do a joint bidding with the intention of pretty much, again, maintaining the volumes that we have contracted in Corpus. So around the 500,000 tons of PET with this integrated PTA. So that is our plan, at this point, as I mentioned, we cannot provide any more color on that due to a lot of restrictions. And in that case, yes, if we would have to invest some additional money, if we were to keep let's say 50% of the plant, particularly to finish PET and PTA, we don't know exactly yet what that number is. We are right now in due diligence to be able to determine the amount. But yes, there will be some additional CapEx required even to maintain more or less our existing capacity. In terms of the anti-trust issue of course, it's something we have to look at very carefully, and -- but again, we do believe that at the end of the day, as you know, this is a very global market. Just for your information, during last year, 712,000 tons of PET were imported into North America and even after the shutdown of the M&G facilities, which as you know will be reopened -- or what -- well, some of them have been reopened and the other will again start, I assume soon. But even with the plants, with the 2 plants of M&G down, the Altamira and the Apple Grove plant, there was plenty of supply of PET into the market, which again attests for the fact that the global market or global producers are able to supply North America. So I do believe there will be a very strong important factor in the FTC termination. The fact that no matter what, we will continue to compete with foreign suppliers of PET. And in terms of spreads for next year, well, we -- I would say we see 2 or 3 factors that will help improve the spreads in PET. Number one is as we explained, the fact that crude oil prices are increasing. That normally, traditionally helps the PET margins. Number two, and perhaps even more important than number one in a sense is the fact that we have seen, as I mentioned also some improvement in 2017 -- some improvement in the margins, PET margins in Asia as a result of market growth outpacing again new capacity. So there has been some improvement without question in those margins and as I mentioned before, these margins in Asia have a direct impact in the prices and margins in North America. So we do believe that is also going to help a little bit and I would say those will be the factors that are going to help the most and however, we are assuming that the margins in 2018 will recover only half -- or a little bit more than half of the reduction of margins in '17 versus '16. So what I'm saying is the -- in our budget, the margins for '18 are below the margins we have in '16 and for all practical purposes in the last 5 years. So margins are still very competitive, let's say, for PET customers. So those are the basic assumptions. And before somebody asked that, we do see a potential upside, particularly in the Polyester portion of the business easing in volume. In our budget, we are assuming that the Altamira plant will be operating at approximately 70% of the capacity. And we are doing our best to try to support the customer to operate their plants at full capacity are they used to do in the past. So hopefully, there is a little bit of upside in terms of volume with regards to Polyester particularly in the M&G Altamira plant. That is an upside that we are working to try to make it happen.
We'll go next to Christian Landi with Scotiabank.
I have a question. I understand that Cosol plant, the cogen plant in Cosol generate savings for between $20 million, $25 million, for maybe, even $30 million on a daily basis? So I was wondering if your guidance of EBITDA would be affected in between the $20 million, $25 million in case you sell the plant or take the contraglobal [indiscernible] tax position of it in Q1 or maybe Q2, what would be the potential impact? And another question if I might, I see that the revenue per ton in the guidance is virtually flat versus what you had in 2017, but your Brent prices are -- while your estimated Brent crude prices, 4% above, so I was wondering is this revenue impact or the factor is flat driven by mix? Because Polyester is going to be more of the sales mix? That would be my question.
Yes. Well, first of all with respect to Cosoleacaque, we do are including in our, let's say, full year, approximately $30 million EBITDA from cogeneration plant from both Cosoleacaque and perhaps Altamira, because as we mentioned, in the base case, we assumed that there is not a sale of the cogeneration asset. So to be consistent with that, we have maintained approximately $30 million of EBITDA coming from the cogeneration asset in Mexico. And with respect to the margin, I will let Eduardo answer that question.
Regarding revenues, we do have a decrease in some of our products due to raw materials decrease. Even though we do have an uptick in terms of the oil prices, we expect propylene prices to decrease in 2018 to about $0.39 per pound versus an average of $0.45 per pound in 2017. That would be the major driver for Plastics & Chemicals. In the case of Polyester, we do expect an increase in terms of the paraxylene prices and in consequence, an increase in PTA and, as Pepe described, in PET. In the case of paraxylene, we do expect paraxylene prices to be between around $986 per ton this year versus $954 per ton last year. So we do have a mix among our product portfolio.
We'll go next to Liliana Leon with GBM.
Could you please give us more color or detail on the current situation for Suape, Citepe, I mean in terms of profitability? I know if it's still -- for us to assume that they -- for you will have like operating [ loss or loan ] $30 million?
Well, I think it's a good question. I think our perspectives in that have changed a little bit. Remember, first of all, we were assuming that they would take control or the transaction will close some time, perhaps, even last year. So as time has gone by, I think the loss of -- or the negative EBITDA of that operation has been coming down. I would say the last information is probably flat, so we believe that once we take over, I think the first year is going to be flat to a slightly positive and then over the next years eventually, of course, the EBITDA will hopefully become relevant. I think we've mentioned that our equilibrium that we target for EBITDA in that transaction will be around $70 million per year. But it will take some time to get there. But again, trying to be very specific about your question, we are not expecting a minus $30 million EBITDA next year. We're not. We believe it's, again, flat to a slightly positive.
We'll go next to Luiz Carvalho with USB.
Just a quick question. You guys intend to provide in guidance for us [indiscernible] do was the approval and if you do when should we expect it?
Well, we want to wait until the transaction is closed, and we take a look at the latest numbers. Once we do that, I think we will be able to give you a more educated guess of the guidance for this year.
We'll go next to [ Rodrigo Perdizco ] with GBM.
I just have a question regarding the also the generation plant but also the other one, the Altamira plant. I was wondering if it will also have some impact on the EBITDA figure you've given us for guidance. Regarding the positive impact that it would have on the EBITDA? And if we could expect some positive impact to a lesser extent even if you sell it through an agreement with the buyer or something of that sort?
Well, it's already included in the figures I mentioned. What I said is that we are assuming in our budget, $30 million EBITDA, I think is a little bit, yes, around $30 million EBITDA for both plants, Cosoleacaque and Altamira. I think in the case out of that, Altamira is like $9 million or something like that, because again, we're assuming a start-up by the end of the year. So it will be -- it would not be a long time in this year to have a significant impact. So that's what we are assuming at this point.
[Operator Instructions] We'll go next to Gilberto Garcia with Barclays.
Is there a potential for you to incur any taxes related to the sale of the cogeneration assets? What's the book value of these assets?
Well, the answer to your question is, yes, we would have taxes as a result of this deal-- I mean, hopefully, because if you make some money, you have to pay taxes normally, yes. But at this point, I would not like to disclose any numbers. We will, again, be very open and specific about it once we close the deal.
Okay. But then let me put it this way, you -- just to make sure I understand, you mentioned that if you closed the deal and also that -- the Brazilian acquisition, the net effect would be positive for you in terms of cash flow, right?
Yes. Yes. Yes, well. Remember, the cost of our assets in Cosoleacaque was around $140 million, and in Altamira, we have also mentioned numbers of $350 million, okay? And in the case of Brazil, it's going to be $385 million. So yes, of course, we are expecting we're going to sell our assets at higher than book value for sure.
With no questions in the queue, I'd like to turn the conference back over to Mr. Lozano for any additional or closing remarks.
I would just like to thank everyone for participating in today's call, and please feel free to contact us if you have any follow-up questions or comments. Have a nice day.
Ladies and gentlemen, that does conclude today's conference. Thank you for joining us.