Orbia Advance Corporation, S.A.B. de C.V. (ORBIA) Earnings Call Transcript & Summary

Good morning, and welcome to Orbia's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded. I will now turn the conference over to Diego have, Orbia's Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Orbia's Second Quarter 2024 Earnings Call. We appreciate your time and participation. Joining me today are Sameer Bharadwaj, CEO; and Jim Kelly, CFO. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business. and actual future results may differ materially. Today's call should be considered in conduction with cautionary statements contained in our earnings release and in our most recent Bolsa Mexicana de Valores report. The company disclaims any obligation to update or revise any such forward-looking statements. Now I would like to turn the call over to Sameer.

Thank you, Diego, and good morning, everyone. Before we begin discussing this quarter's results, I would like to thank our global employees for their continued commitment to improving business performance and solving our customers' challenges in difficult market conditions. Turning to Slide 3. I will share a high-level overview of our second quarter 2024 performance. Revenues of $2 billion decreased 9%, and EBITDA of $334 million decreased 25% compared to the prior year period. EBITDA included $13 million of nonoperating charges. Compared to the previous quarter, our results demonstrated sequential improvement across all businesses, in line with anticipated trends discussed during our first quarter earnings call. While volumes have started to show a recovery in many of our businesses and geographies compared to the prior year quarter, revenues continued to be impacted by lower prices and unfavorable product mix. However, despite these near-term headwinds, long-term fundamentals remain strong. As part of our previously stated strategy to be disciplined operators and good stewards of capital, we continue to take proactive steps to control costs and maximize efficiency across our businesses, which will enable Orbia to capture benefits associated with market recovery, and to continue to create value for our shareholders. During the quarter, progress continued on the engineering for the investment in U.S. PVDF capacity through a joint venture with Syensqo. The Board of Directors also approved moving forward with engineering for the LiPF6 project. Our new Building and Infrastructure facility in Indonesia is nearing completion and is expected to begin commercial operations in the fall. The expansion of our specialty compounds joint venture plant in India for semiconductor compounds is also nearing completion. In addition, the Building and Infrastructure business is launching a slew of new innovative products in the fall. We also continued our focus on cost optimization, reducing year-to-date manufacturing and SG&A costs by a total of $35 million compared to last year. I will now turn the call over to Jim to go over our financial performance in further detail.

Thank you, Sameer, and good morning, everyone. I'll start with a discussion of our consolidated second quarter results on Slide 4. I'll remind you that the first half of last year was strong, so our second quarter comparisons are challenging particularly in Connectivity Solutions and Fluor & Energy Materials. Net revenues of $2 billion for total Orbia were down 9% year-over-year, with lower or flat sales across all business segments. Although volumes were up -- were flat year-over-year in most of our businesses, they were more than offset by lower prices and unfavorable product mix impacts. EBITDA was $334 million in the quarter, which represents a decrease of 25% year-over-year, largely driven by lower revenues across our businesses. As Sameer noted, this EBITDA included $13 million of nonoperating costs in the quarter. Operating cash flow of $4 million, decreased by $212 million compared to the prior year quarter, primarily due to the lower EBITDA and the use of cash for working capital. Free cash flow in the quarter was negative $130 million, a decrease of $160 million year-over-year. Lower operating cash flow compared to last year was partly offset by lower capital expenditures. Our effective tax rate was negative 61% for the quarter as compared to 80% in the prior year period. The tax benefit this quarter was primarily due to the depreciation of the Mexican peso against the U.S. dollar. Excluding the foreign exchange impact, the effective tax rate would have been 22%. Net debt-to-EBITDA increased from 2.96x to 3.39x in the quarter. Net debt increased due to a lower cash balance, which was partially offset by a decrease in total debt. Additionally, the 12-month rolling EBITDA decreased since the calculation now excludes the strong EBITDA quarter of Q2 of 2023. Orbia made dividend payments of $80 million during the quarter, which consisted of the first and second installments of the $160 million ordinary dividend that was approved at the Annual Shareholders Meeting held on April 9, 2024. Turning to Slide 5, I'll review our performance by business group. In Polymer Solutions second quarter revenue of $644 million was flat year-over-year supported by higher volumes despite the temporary operational disruption at our Altamira 1 facility in Mexico due to the water challenges and lower prices across the portfolio. Second quarter EBITDA of 170 -- $107 million, was up 4% year-over-year with an EBITDA margin of 17%. The EBITDA increase was driven by higher volumes the continued recovery in U.S. and U.K. wire and cable markets in our Compounds Business and the ongoing implementation of strict cost control measures. In Building and Infrastructure, second quarter revenue was $665 million, a decline of 5% year-over-year, driven by continued market challenges across parts of Europe and Latin America and low resin prices. Second quarter EBITDA was $78 million, an increase of 4% year-over-year with an EBITDA margin of 12%. The EBITDA margin improvement was driven primarily by operational cost optimization, partially offset by an unfavorable product mix. Moving to Precision Agriculture. Second quarter revenue was $284 million, a decrease of 2% year-over-year due to softness in Turkey, India and the U.S. partially offset by stronger revenues in China, the Middle East and Africa. Second quarter EBITDA was $39 million, down 3% year-over-year with an EBITDA margin of 14%. The decrease in EBITDA was mainly driven by the lower revenues, partially offset by benefits from cost-saving efforts. In Connectivity Solutions, second quarter revenue was $236 million, a decline of 30% year-over-year. This was driven by lower volumes, weaker prices compared to last year and an unfavorable product mix. The decrease in volumes was caused by a combination of the ongoing high interest rate environment as well as customers reducing excess levels of inventory in the supply chain. Second quarter EBITDA declined 63% to $41 million with an EBITDA margin of 17%. This was driven by lower revenues and lower absorption of fixed costs in our manufacturing sites partially offset by lower input costs and benefits from the implementation of cost-saving initiatives. Finally, for Fluor & Energy Materials, second quarter revenue was $230 million, a decrease of 13% year-over-year, largely due to softer volumes in refrigerants due to quota phase-downs in the U.S. and Europe and high customer inventory levels in the U.S. Second quarter EBITDA was $81 million, a decrease of 30% year-over-year with an EBITDA margin of 35%. The lower EBITDA was due primarily to the lower refrigerant volumes, partially offset by cost optimization measures. In conclusion, we've continued to execute our operating plan for 2024 and despite ongoing headwinds by driving revenues, meaningful cost optimization and operational efficiency efforts. We have a demonstrated track record of successful navigation across all parts of the cycle, and we remain confident in our continued ability to do so. With that, I'll now turn the call back over to Sameer.

Thank you, Jim. I would like to share some of the highlights from our efforts to continue advancing sustainable solutions to solve our customers' problems. We continue making progress towards the commercialization of our low-carbon medical propellants with a key long-term customer contract in place and others in process. Design and engineering of a large-scale medical propellants facility in the U.K. has begun. Revenue streams from our next-generation medical propellant sales will include intellectual property and licensing fees for formulations in addition to propellant sales. We are working on exciting new projects in the Building and Infrastructure and precision agriculture businesses that we will share in the next quarter. Turning to Slide 6. I will provide an update to our outlook for the current year. As we enter the second half of 2024, headwinds persist including a higher for longer interest rate environment around the world and a weak building and construction and infrastructure environment. We also see a recovery in a couple of our businesses. Our current EBITDA estimate for full-year 2024 is approximately $1.3 billion, should business conditions remain stable. Total capital expenditures are expected to be in the range of $500 million to $540 million for 2024, including maintenance and strategic growth-related investments. We expect our effective tax rate for the year to be between 29% and 32%, and we expect that by the end of the year, our net debt-to-EBITDA ratio will decrease to between 2.7x and 2.85x. Looking ahead in each of our business segments to the coming quarter and the balance of the year. Beginning with Polymer Solutions, we expect our end markets to remain relatively flat throughout the second half of the year. However, we will continue to focus on maximizing volumes, optimizing production with a focus on profitability and strict control of expenses. In Building and Infrastructure, we expect an improvement in the second half of the year supported by a gradual recovery in parts of EMEA and Latin America and continued benefits from optimizing operational costs. The business will remain focused on delivering cost efficiencies, growing the profitability from new geographies and introducing new products. In Precision Agriculture, market conditions are expected to remain flat in most geographies due to the prevailing interest rate environment, and low crop prices. The business will continue to implement strategies to grow its market penetration in extensive crops, focus on cost management and optimize operations. In Connectivity Solutions, we expect the sequential volume recovery to continue throughout the second half of the year and the initial distribution of U.S. government funds for fiber deployment towards the latter part of the year. And lastly, in Fluor & Energy Materials, for the balance of the year, we are focused on maximizing production and optimizing value across the chain. Pricing is expected to remain stable. The business will continue to focus on cost management and optimizing operations. In closing, our focus remains on proactively navigating through market challenges through commercial, operational and financial discipline to meet the needs of our customers and generate long-term value for our shareholders. Operator, we are ready to take questions at this time.

[Operator Instructions] And our first question today will come from Leonardo Marcondes with Bank of America.

Well, I have two questions here from my end. The first one is related to the guidance. It seems that the improvement is expected to come mainly from the Building and Infrastructure and Connectivity Solutions segments, right? So I was wondering if you could point out what are the risks involved in these assumptions? I mean, what could impact these improvements in the second half of the year? And my second question is more related to the new projects that you guys are implementing. Could you provide some update on the PVDF and LiPF6 project, please?

Thank you, Leonardo. Let me address your question on guidance. As we have talked about the outlook for the second half, we, we've demonstrated significant sequential improvement, and we want to build upon that momentum and see that momentum continue. As you rightly took away, the improvements will come in the Building and Infrastructure business, that's from seasonality. And in Connectivity Solutions, so we are seeing demand come back. And depending on the pace of that recovery, we will see how quickly that accelerates through the course of the year. As of now, we have an order backlog, and we are working hard to staff up the plants to meet deliveries. We are also seeing strong demand and results in our Polymer Solutions, Specialty, Compounds Business. And so that will also contribute in a significant way in the second half of the year. And now the risk to watch out for in the second half is what happens with PVC pricing. If PVC pricing remains stable where they are right now, which is in the mid- to high 800s, we should be fine. And if PVC pricing goes down, that could be a downward risk. Having said that, what we have seen is, today, the exports from China, we are beginning to see a decline. This was partly driven by high logistics costs out of China. We are about $180 to $200 a ton. We have also seen Europe imposed antidumping duties on U.S. exports of PVC about 60% to 70% depending on the manufacturer. So these are both factors that support a higher PVC price. And while this might put pressure on PVC exports from the U.S., we have the ability to place our PVC in markets where pricing is favorable. And so we hope to manage through that situation in that manner. And then Fluor and Energy Materials, the outlook is stable with respect to the first half of the year. Your second question was around the LiPF6 and the PVDF projects as we had the groundbreaking ceremony for the PVDF project with our joint venture with Syensqo at the location in Georgia, where the polymerization facilities will be. And right now, we are in the engineering phase for that project. And we still don't have a fully developed estimate or plan for the timing of when the plant will be built. But at a high level, it should be in the '27, '28 time frame. So the LiPF6 project, which is right behind the PVDF project, we presented the business case to the Board earlier this week, and we have now secured the Board's approval to proceed with the FEL-3 level engineering for the LiPF6 project.

And our next question will come from Pablo Monsivais with Barclays.

I have a table question. On your optimization efforts, Sameer, you mentioned that you have savings for $35 million so far. How should we see those efforts evolving for the second half of this year? And what should we expect from those for 2025?

Great, Pablo. So as I've said, our focus has been relentlessly to drive the top line, bottom line control spending in between. Work hard on working capital and super disciplined in CapEx allocation so that we can definitively turn this business around independent of a market recovery. So as part of these efforts, we have rolled out extensive business optimization efforts across all of Orbia in most of our businesses. And these efforts include working on SG&A cost reductions, manufacturing cost reductions as well as optimizing our manufacturing footprint and which would take a couple of years to execute on. You can already see that in the results. We have demonstrated a $35 million year-over reduction in manufacturing and SG&A costs. And you can imagine a full-year impact of that of $70 million of that order of magnitude or more. And as we continue these efforts, the goal of this exercise is to restore the baseline earnings power of Orbia closer to $1.5 billion independent of any market recovery, okay? So without counting on any market recovery, the efforts that we will execute along these lines should help us to get it to $1.45 billion to $1.5 billion. And then, of course, then you can layer market recovery as increased interest rates go down in September, as expected, and that momentum continues, then we should see a release of pent-up demand. And if that market recovery comes over the next couple of years, that would be in addition to restoring the baseline. And then beyond that, we have our growth projects. And at this point, we are super selective about which growth projects we invest in. Only the highest IRR projects will get funding from a capital allocation standpoint. And in that context, I want to reemphasize that while we are working through this challenging market situation and focusing on demonstrating have definitive improvement in business performance quarter-over-quarter, we are absolutely committed to maintaining a healthy balance sheet and our investment-grade rating. And we have multiple levers to manage our leverage to a reasonable level below 3.0 as we go through the next few years.

Okay. A follow-up, if I may, on what you just said, the 1.5 earnings power or EBITDA that you are suggesting. Do you have any similar amount for like long-term maintenance CapEx needs?

Long term, sorry, maintenance CapEx?

CapEx. Yes.

Yes. So our maintenance CapEx, depending on the year, there are some plants for which the turnaround happens only once in 2 years or once in 3 years. So depending on the year, the maintenance CapEx is typically between $270 million and $300 million every year. And then on top of that, we have the growth capital. Now for this year, we are striving to get to the low $500s in terms of total capital. So let's say the midpoint of our guidance is $520 million and of which $270 million will be maintenance CapEx and the rest is the growth CapEx. And then over the next couple of years, we are going to be super disciplined with respect to growth capital such that only the highest IRR projects are funded. And then for some -- we've already made several growth capital investments, of course. These are smaller investments in the Building and Infrastructure business, in Connectivity Solutions, in Precision Agriculture in the Compound Business, these have already been deployed and will begin to start contributing to results in the second half of this year and in next year. And so those should also start to contribute to the earnings meaningfully.

And our next question will come from Pablo Ricalde with Santander.

My question follow-up on the other comp question on the CapEx. How much of this $520 million CapEx guidance should go to the Energy division?

So the balance of the -- it's about 250 in total that is going to growth capital this year. We can get this number to you off-line. Off the top of my head, this year, we are only focused on engineering for both of those projects. So we can confirm the precise numbers off-line. But I would imagine it would be in the tens of millions, okay?