ALPEK, S.A.B. de C.V. (ALPEKA) Earnings Call Transcript & Summary

Hello, everyone. We appreciate your participation in today's webcast and your continued interest in Alpek as we present our third quarter results. I'm Juan Diego Siller, the recently appointed Investor Relations Officer. Here with me today are Jorge Young, our CEO; and Rodrigo Prieto, our CFO. Before we begin, please note today's discussion will include forward-looking statements based on current expectations and assumptions subject to certain risks and uncertainties. Actual results may differ materially. Alpek undertakes no obligation to update these statements. We express our financial results in U.S. dollars unless otherwise verified. For your convenience, this webcast is being recorded and will be available in the Investors section of our website. Regarding today's agenda, Jorge will begin with the quarter overview. Second, Rodrigo will discuss our financial performance in greater detail. Afterwards, Jorge will delve into our revised guidance figures and expectations for the remainder of the year. And finally, we will move on to Q&A. Jorge, I'll turn the call over to you.

Good morning, everyone. Thank you for joining us. During the third quarter, our teams once again delivered strong execution responding to evolving customer needs and maintaining high operating rates. Our focus on operational efficiency, commercial agility and supply chain flexibility enabled us to adapt to market conditions, resulting in another exceptional quarter. As a result, we outperformed our comparable EBITDA expectations for the quarter. Building on our year-to-date performance and updated outlook for the last quarter of 2026, we are again raising our full year guidance, which I will discuss in more detail later in the call. Our leverage ratio improved to 1.8x primarily reflecting higher last 12 months EBITDA. Our local-for-local production strategy and constant pursuit to strengthen our competitive position continued to be fundamental pillars for Alpek's success. Our global footprint and regional approach to key markets, including the United States, Mexico, Brazil, among others, has enabled us to provide reliable long-term supply and service to our customers as a domestic supplier of choice. This has been particularly important amid continued global trade disruptions and raw material shortages, mainly in Asia, in the Middle East extends, in Asia -- is facing renewability of key feedstocks and lower operating rates, supporting revenue margins above our original expectations. In parallel, elevated ocean freight rates have made imports less competitive, order benefiting regional suppliers like Alpek. These dynamics reinforce the importance of the actions we have taken over the last several years to make our company more competitive and resilient. Our performance reflects the progress we have made in during Alpek's long-term strategy. Over the past few years, we have taken deliberate actions to reinforce our competitiveness, improve the quality of our portfolio and reinforce our financial position. Let me highlight some of the initiatives underway across our 2 strategies by financial flexibility. First, strengthening our core business. We have continued to optimize our global footprint, directing production towards our most competitive and integrated facilities while providing cost efficiency. Since 2023, we have reduced installed capacity by 15%, including fiber capacity and head count by 29%, while maintaining similar volume levels. This demonstrates the effectiveness of our linear operating model. At the same time, we continue identifying opportunities to further improve performance within the organization. Earlier this month, we hosted our Annual Innovation Awards from across Alpek presented projects or -- this will focus on cost reductions, product improvements, business integrations, et cetera. We currently have more than 40 projects requiring minimal or no CapEx representing over $20 million of potential incremental EBITDA. These projects reflect a culture of continuous improvement throughout the organization. Second pillar, growing and evolving our product portfolio, we are selectively investing in differentiated applications and differentiated products that offer higher margins. Key needs include expanding our thermoform expansion in Saudi Arabia, increasing our copolymer production in our polypropylene business and venturing into expandable polystyrene extrusion in North America. These investments among several others in our pipeline support a more resilient portfolio over the long term. We're all pursuing capital-efficient growth opportunities by leveraging our assets, capabilities and customer relationships to unlock incremental value. As an example, in our energy commercialization business, we continue expanding into the electricity sector in Mexico and have begun supplying natural gas in Brazil. Third, financial flexibility is a key enabler of our strategy. Even though our leverage level is now below 2.0x, our focus remains on generating cash flow and further reducing debt. This includes working capital management, disciplined CapEx and progressing asset monetization. These actions support our objective of maintaining a strong balance sheet while preserving financial flexibility to pursue attractive growth opportunities as they arise. With that, I'll turn the call over to Rodrigo to discuss our financial results in greater detail.

Good morning, everyone. Thank you for joining us today. Landing goal in our third quarter results. Market conditions remain supportive. Still 59% above 2025 levels. Ocean freight rates to South America also remained elevated, averaging $321 per ton, up 43% quarter-on-quarter and 74%. Comparable EBITDA totaled $276 million, down 18% quarter-over-quarter yet doubling when compared to the same period last year. Reported EBITDA also saw a significant -- $203 million. This included a $27 million inventory adjustment primarily associated with higher raw material price. Volume from the quarter remains solid at 1.17 million tons, flat sequentially and up 4% on an annual basis. reflecting solid demand levels and continued commercial and operating execution strength. Looking at our business segments, polyester achieved a comparable EBITDA of $205 million, increasing 134% year-over-year. Plastics samples delivered comparable EBITDA of $62 million, 32% above the prior year. The remaining 1 million comes from the others or emerging business segment, primarily consisting of our energy commercialization. Turning to free cash flow. Alpek generated $5 million in operating free cash flow as higher reported EBITDA was offset by a larger than anticipated investment of $226 million in net working capital, driven mainly by higher pricing environment, particularly -- reaching multiyear high. CapEx totaled $46 million, including $30 million in strategic CapEx. During the quarter, net debt increased 3% owing $72 billion, primarily reflecting the investment in net working capital and, to a lesser extent, payments to minority shareholders. At the same time, our leverage ratio improved to 1.8x from 2.2x, primarily driven by higher -- EBITDA and now below our target range of 2 to 2.5x. Year-to-date, we have generated $222 million in operating free cash flow and reduce our net debt to $123 million. Our improved leverage position reflects the progress we have made in strengthening our valuation and process our commitment to financial discipline. Looking ahead, we expect to further reduce net debt in the fourth quarter through continued cash generation, distributor allocation and debt prepayments. I also like the important milestone for Alpek. During the quarter, we rejoined the IPC Index, which consists of the top 35 public companies based on market cap and trading liquidity listed in the Mexican Stock Exchange. We believe this will further enhance our visibility among investors and contribute to long-term shareholder value creation. I'll turn the call back to Jorge to discuss our guidance and...

As we look to the remainder of the year, we're expecting PP reference margins and ocean freights to moderate while remaining well above '25 levels. Based on our year-to-date performance and updated market assumptions, we're again raising our full year 2026 guidance. Our key assumptions for the remaining months are: Chinese PP reference margins at $225 per ton or opening reference margins at $0.17 per pound. And ocean freights to South America at $200 per ton. On this basis, we are raising our comparable EBITDA to $990 million. For '26, we continue to expect operating free cash flow in the range of $300 million to $350 million and net debt reduction between $200 million and $250 million by year-end. And this is considering some moderation in the raw material pricing in large. This continued focus on cash generation and deleveraging will further enhance our financial flexibility, supporting disciplined capital allocation and selective investment in future growth opportunities. The remaining guidance figures are unchanged. As a reminder, our guidance does not include potential upside from nonstrategic asset sales. As we approach 2027, the actions we have taken to optimize our footprint, improve efficiency and to strengthen our financial position have made Alpek more competitive and better positioned to navigate changing market -- our long-term strategy remains focused on leveraging our global capabilities and to deliver consistent operational performance while reinforcing our position as a reliable domestic supplier. While industry conditions will continue to evolve, our priorities remain clear. We will continue focusing on reliable operations, serving our customers, managing costs and allocating capital with discipline. I am very confident in our team's ability to execute our strategy and continue creating sustainable value for our shareholders. And finally, I would like to thank our employees across Alpek for continued dedication and commitment, their agility and ability to find solutions in a rapidly changing environment having instrumental performance this year.

[Operator Instructions] [Audio Gap].

On the absolute reduction of level, and that will give us the tools and the flexibility to expedite an interesting pipeline of projects that we have, and that will bring further share for Alpek.

And for my second and follow-up question, I believe in both segments, you tend to lock in a proportion of your volume to fixed or fairly stable margins. And given what's happening in both sides of the business right now, because of the Middle East conflict, how -- can you give us some understanding as to how do you expect those contracted margins to look in 2027 versus '26 or '25 just so we can have some magnitude. .

Yes, it's order we still have in -- as you clearly know, we are just beginning or the period where we normally have those discussions and agreements with the customers. We would expect margin certainly to be higher than 2025 compared to '26. It depends, right? I mean, in many cases, we ended up into agreeing to a price as the year began and as the conflict in the Middle East was rising. So they were very favorable to us in 2026. Some of those might moderate a little bit in 2027. Another important chunk of our volume had margins for 2026 agreed before the conflict of in -- and some renegotiations and adjustments to be able to do what we needed to find all the raw materials and deliver the product reliably. So those contracts also capture some adjustments, some increases in 2026. But those will likely keep further increasing in 2027. And at the end, it's going to be a mix that we still need to go through. Again, some will moderate, so we'll have other -- some level of increase. What we expect to see in 2027 is a very strong volume, similar to -- in '27 similar to 2026. I think the momentum and the appreciation from the customer base for the local supplier remains high. The conflict is still uncertain. We are planning or planning to plan as -- I mean, the conflict will resolve and the condition will get challenging. But the uncertainty remains, and again, we are making very good progress on aligning on the volumes. The margin is an important variable to complete on those -- indicates to us that it's going to be a very good year in volume and the margin will be further refined. I would say a good conditions for us. A very good position for us with our key customers and new customers that we brought to the table in 2026. [Audio Gap]

That working capital should respect to be released over the next few quarters? And if I may, I would like to make the second one, now and then you guys can answer both. The second one is more on the asset sales. I recall that this was initially a pretty important part of the deleveraging story. And Jorge mentioned today in the call that asset monetization remain one of the key pillars. But with market conditions improving, you have managed to bring leverage down much faster than initially expected. So given how things have changed are you reconsidering the sale of some of those assets? I mean, could it make more sense now just an additional point in the dornase -- sales for the year.

On your first question on working capital, I think it all depends on -- when you look at our working capital, we look it in 2 ways. The absolute level, of course, because that goes into the cash flow. Days of working capital and we have an issue with receivables, with our payables or with our inventory days. And when you look at our numbers, what we expect them to be. We have disciplinary inventories, and we have, again, receivables and payables exactly we have turned over the year, right? And so the only issue is unit prices and unit prices have increased significantly because of the oil increases in some of our feedstocks, further increases like are -- and it's a matter of when those prices moderate, yes, we will recover the working capital. If they recover to 11, right, to close to where they were before the conflict, fully recover a significant, if not all, of that working capital investment. So it is very much relevant to the unit prices. We do expect, again, some moderation, right, eventually and -- is the issue at hand for more excessive issues in collections or payment further. So that's on the working capital. So it's a matter of when they have the absolute prices fall and version and to what portion -- high priority -- we are still expecting to close this year between $30 million and $50 million. We have progress on some of those asset sales. Year-to-date, it's about $14 million. And the fact that we have now lower leverage doesn't slow down our efforts in disposing of those assets because we shall label those assets to keep them at all. And I think it's -- we are decided to sell you're talking about pieces of land and so forth. And we will probably have in addition to the goal this year, perhaps another important objective next year to dispose of further nonstrategic assets to continue the momentum. And again, as we have mentioned this in previous calls, we're going to take more time to prepare our piece of land in Monterrey to dispose their assets perhaps in a couple of years, but at a much higher expected value than what we could relapse today at a fast -- so that continues unchanged and with high priority.

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

I have also 2 from my end here. The first one is regarding the spreads. I mean, PP spreads have come down from their peak, right? They remain to prior levels, right? So my question is, do you see room for further narrowing in 2027? Or do you expect spreads to stay above pre-war levels? And what are the main drivers behind your view on that? . My second question is regarding volumes. I mean Jorge has already discussed a bit about the strong volume this year. But I mean how much of this reflects like a stronger demand? And how much reflects share gains as imported products have become less competitive.

Yes. Thank you for your question, Leo. I think the question of spreads, I mean, it's a very good question that we ask ourselves all the time. The way we see things right now is that we expect the spreads to moderate. That means they likely come down on some path. But it is our view that they will -- they might remain above 2025 levels. But I think the production utilization rates these years have been disrupted globally, especially in China and Asia. So the inventory positions are not in the same place. It might take sometime for the supplies of inputs from the Middle East and the global supply chains to normalize. One another observation we have is that in Asia, Asian producers, many of them had access to discounted sanctioned oil. And the -- to what extent was enabling them to go to very low margins, not only in PP just generally in chemicals. It's a question that we have. But is that -- it was a contributing factor. Access to sanctioned discounted oil is impaired for now, and it might not come back to the levels to where it was. So again, we just don't have a specific number. We'll obviously, we'll share a number and an assumption in February when we share with you the guidance of 2027. But sitting here today, we would expect, again, some of the margins coming down from the current levels, both still remaining with some healthy distance to the '25 levels. But we -- again, we'll find that analysis as we go -- as we approach our next call with you guys. And also on the oil, one thing I forgot to mention, at least for right now and in the short term, the shipping cost of oil deliver inflation produced services is higher, right? So that support or hypothesis that conditions might stay elevated for some time. Volume -- for the most part, the volume gains that you saw in our numbers this year is for gaining share to imports. Yes, I think the industry at industry in North America had a good year with the World Cup, I think some segments in beverage also performed well. Of course, drinks, water and so forth. So it was a good year on demand. So the -- I would say, behind the volume gains, it will be more -- will be more market share and mostly related to imports. I mean you don't get to appreciate in our numbers. For example, in our Polyester segment, you will see cumulative 9-month to 9-month growth of 3% to 4%, maybe it's going to be 4% to 5% when the full year -- when we have the full year numbers. But if you could look into the mix, we have a mix of polymer sales and reduced the volume of terephthalic acid exports, we are typically the lowest contributors in margins. So our mix has improved relative to the numbers -- to the volumes we do before.

Our next question comes from Nicolas Barros with JPMorgan.

I've got 2 questions here. So given that you're already below your targeted range of leverage, right, would you be considering to bringing forward any kind of discussions related to this? And then my second one on freight prices. Could you comment more on the review impact of freight prices to your pricing part capability, right? What is the real relevance of freight to the port per calculation. And if you could give us any kind of sensibility to freight prices and EBITDA, right? That would be very helpful. .

Thank you, Nico, for your question. I mean the good results and the improvement in leverage will not distract us from our focus on our strategic pillars of creating financial flexibility. So coming back, debt reduction is very important for us. And before we talk about any dividends. We're very focused on reducing debt on the first hand. We'll get to see how numbers are coming, right, for next year? And after that, we might start the discussion of dividends. So I'd say first quarter of next year, we'll start evaluating and discussing. And I mean, we don't want to discard anything, but we're going to take a longer-term view before we make any decision. .

On your question on freight rates, right? And I guess you are talking about container freight rates that influence the import parity of the products we sell, in the regions we sell. I mean, in some of our markets, like South America, it's very typical. But if freight rate is a component in the pricing structure, so you see a clean impact or direct impact on the pricing. So given our typical volume into that region from what we produce in South America or what we -- from North America into South America, let's say, a $10 change in freight might correlate with $5 million change in EBITDA just for that region. The other regions, the equation is more complex because freight rate is less. It influence the pricing, but it's not necessarily a component in the formulas. I don't know if we have provided these figures before, but our rule of thumb, once you factor all Alpek is probably $1 in change of freight rates is $1 million or $10 is about $10 million. We'll refine those calculations and get back to you.

The following question comes from Tasso Vasconcellos with UBS.

The first one, I would like to ask again about these freight rates, but another point of view. Because as you just mentioned, Jorge, it is positive for you guys that you can take a better pricing following that. And when we look globally, we're not seeing any signals of the ending of the conflict. So there might be some persistent challenges from here in terms of these freight rates globally. So I'd like to hear your view on how you're seeing these evolve, not just for the next quarter, but maybe for the next 1, 2, 3 years. And how could the OpEx enter the coming years? . And then my second question, the President Trump, he has been saying that U.S. in Mexico, they are moving closer to a potential new agreement and there is the election in the U.S. as well in the next month. So do you guys expect any kind of impacts on either to the positive side or to the comp side in terms of your operations. Can you take some kind of benefits from that looking forward? I would like to hear your thoughts on that as well. Those are my 2 questions.

Thank you, Tasso. I mean I think predicting the global ocean container freight market is challenging, but I think the fact that there is geopolitical tension, but I think we're continue to go into a world with more uncertainty. I think that will continue to introduce volatility to freight rates. Sometimes it's not only the rate, also it's the availability. And again, those are factors that have been supportive of our business, that uncertainty. I think they're going to remain uncertain, but it's very difficult to pinpoint what specific level they will have in the next 1 or 2 years. I think is there is ample capacity of ships in the world. But the -- again, the continued volatility and unpredictability of events, and many times, including weather events has kept the ocean global fleet in a position where it has been very difficult to predict where it's going. I'm just saying for Alpek, again, the volatility will be supportive because it will continue to bring uncertainty or disruptions to the freight environment. Again, in February, we'll take a shot at a number and share with you that assumption explicitly in our February call. And the second question on the discussions, negotiations between the United States and Mexico, we do not expect an impact. Right now, we do have against some flow of our products. PTA, terephthalic acid or PET polymer, either ourselves or customers and other styrene EPS. But we have been always in what we call complying with the USMCA requirements for content. So we are safely into that. And obviously, we don't have all the access to all the details in the negotiations, but the way we hear things are progressing, we don't expect issues for our operations.