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spk09: Good morning, and welcome to the ORBEA first quarter 2022 earnings results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press start and run your telephone keypad. To withdraw your question, please press start and two. Please note this event is being recorded. I will now like to turn the conference over to Gerardo Lozayo, Director of Investor Relations. Please go ahead.
spk07: Thank you, operator. Good morning and welcome to ORVIA's first quarter 2022 earnings conference call. We appreciate your time and participation today. Joining me are Samir Baradwash, CEO, and Jim Kelly, CFO. A friendly reminder before we continue, 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 could be considered in conjunction 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. With that, let me now turn the call over to Samir.
spk00: Thank you, Gerardo, and good morning, everyone. I would first like to take the opportunity to recognize our employees for their resilience and dedication to Orbia and our stakeholders and customers for their faith in Orbia as we advance life around the world. We are facing challenging times across the globe, given the devastating crisis arising from the invasion of Ukraine by Russia, inflationary pressures, and the lingering impacts from the COVID-19 pandemic. I am proud of our team who has led the way in maintaining a relentless focus on serving our customers with essential solutions to advance life around the world. Before going into our numbers, as you may have seen, Orbia is hosting an investor day on Tuesday, May 17th, 2022, and I'd like to take this opportunity to personally invite you to the event which will take place in Boston. There will also be a live webcast of the event for those who cannot attend in person. During the event, we will provide insight into the company's sustainability-aligned business platform, long-term growth and value creation strategy, and multi-year financial targets. I hope you can join us on the day. Now, turning to slide three, I would like to share a high-level overview of our first quarter 2022 performance. Orbia had another strong quarter, starting the year on a high note. Our diversified and integrated portfolio allowed us to deliver robust results, which more than offset the impact of continuing macro pressures, such as cost increases in raw materials, supply chain disruptions, and energy costs, and commercial choices stemming from the invasion of Ukraine by Russia. This represents our fifth consecutive quarter of strong results and significant growth. Revenues for the quarter total 2.6 billion, up 36% versus the prior year, and EBITDA total 611 million, an increase of 35% compared to the prior year. These results were driven by solid performance across our business groups with continued strong demand and pricing. Our EBITDA margin of 23.5% was at the same level as the year-ago quarter. Finally, we increased our operating cash flow by $198 million to $194 million in spite of increased working capital needs due to higher receivables related to the strong volumes and pricing. Our financial performance is underpinned by a healthy balance sheet that enables us to execute our growth strategy by investing in innovation, geographic expansion, and bolt-on acquisitions. During the quarter, our building and infrastructure group completed the acquisition of a majority stake in Vectus Industries Limited, a privately held manufacturer of pipes and fittings and the market leader in water storage tanks in India. This acquisition puts Orbia at the forefront of India's high-growth water management industry. We also continue to grow through strategic partnerships. Fluorinated Solutions signed a three-party letter of intent with FUSUN and the mayor of Kaczerin-Kozle, Poland, to create a joint venture to meet growing demand for inorganic fluorine compounds used in the production of lithium ion batteries in Europe. Orbia Ventures participated in an investor syndicate backing Verdigis, a green hydrogen cell technology developer with new electrolyzer technology. We believe green hydrogen will play a significant role in helping to decarbonize industrial processing at scale. Investment funds raised will be directed to accelerating development and commercialization of Verdigis technology. I would now like to turn the call over to Jim to go through our detailed financial performance in further detail. Jim?
spk08: Thank you, Sameer, and good morning, everyone. Turning to slide four, we once again delivered strong top and bottom line results. As Sameer noted, on a consolidated basis, debt revenues were $2.6 billion, up 36% year over year, with significant growth in polymer solutions, data communications, and building and infrastructure. EBITDA is up 35%, with margins of 23.5%, which were flat compared to the first quarter of 2021. We delivered strong operating cash flow of $194 million during the quarter, despite an increase in working capital, primarily reflecting higher receivable balances associated with increased volumes and prices. Working capital days were flat compared with year-end 2021. Capital expenditures of $101 million were up 89% to the quarter compared to a lower base last year as COVID-19 restrictions prevented us from executing certain projects in the beginning of 2021. We closed the first quarter with net debt of $2.9 billion and our net debt to EBITDA ratio was 1.29 times. Our effective tax rate for the quarter was 34%. This was driven by the appreciation of the Mexican peso in the quarter. In summary, we have a strong balance sheet that allows us to take advantage of investment opportunities for organic growth and bolt-on acquisitions, and to return cash to shareholders during 2022 and beyond. Turning to slide five, I'll go through our quarterly performance in a bit more detail by business. In polymer solutions, performance was driven by strong top-line growth due to robust demand in the construction industry and the ongoing tight supply-demand environment that continued to support PVC pricing. Additionally, and as a reminder, last year's results were impacted by adverse weather conditions in the United States Gulf Coast region which negatively affected volumes. Revenues were up 50% year over year and EBITDA was up 38%. EBITDA margin decreased approximately 270 basis points as higher costs during the quarter were not fully offset by pricing. After a strong start to the year, we're expecting prices in the coming months to remain strong as we head into the peak demand season of the year. We continue to expect the PBC market to remain tight in the coming years with global demand, outpatient supply. For building and infrastructure, we continue to see solid growth in both Europe and Latin America. Revenues increase 15% year over year, mainly driven by higher pricing. EBITDA was up 10% on top of an already strong baseline in 2021 with a margin of 13.5%. down approximately 50 basis points due to input cost increases, which were partially offset by pricing and a mixed shift to value-added products. This quarter includes contribution of the Vectis transaction, which started consolidating in our results in February of this year. Now let me turn to precision agriculture. Revenues during the quarter increased 14% year-over-year, mainly driven by growing demand across most markets, including the U.S., Mexico, and Turkey, while India also started to show signs of improvement. EBITDA was flat with a margin of 16.8% down approximately 230 basis points, largely due to higher year-over-year raw material and input costs that have not yet been fully reflected in selling prices. For data communications, revenues increased 77% year-over-year, and EBITDA increased by 143%. EBITDA margin was 21.6%, an expansion of approximately 590 basis points. The revenue and EBITDA increases were primarily driven by robust volume growth in North America and more favorable pricing. Turning to fluorinated solutions, revenues increased by 19%, driven by higher demand and strong pricing, particularly in refrigerants. EBITDA increased 37%, and EBITDA margin was 37.4%, an increase of approximately 500 basis points, primarily driven by favorable pricing and product mix, which was partially offset by increased input costs. In summary, this was another quarter of strong financial performance and continued focus on operational and commercial excellence. Let me turn the call back to Sameer.
spk00: Thank you, Jim. I'm on slide six. We continued our commitment to the science-based targets initiative to establish a carbon reduction target that extends to scope three emissions reducing the environmental footprint of our products. During the first quarter of the year, we published Orbia's 13th Annual Sustainability Report, covering the role we play in society and our impacts on people and planet together. We strengthened our reporting suite by providing a companion 2021 ESG data book, which provides a data-driven view of our ESG performance. We also further improved our TCFD-aligned disclosures in our climate report, including a more in-depth description of our climate strategy, governance, and risk management. All these recently published reports show the encouraging progress made towards our goals. Orbia's improved performance has also been recognized by external parties, as we were upgraded by key raters MSCI and Sustainalytics. Particularly, I want to highlight that we have set a new target to reduce our environmental footprint across the value chain, which is scope three emissions, by 30% by 2030. With this aggressive target, we position ourselves as one of very few companies worldwide to actually set a scope three target following the SBTI criteria demonstrating our commitment to decarbonization and climate action. Turning to slide seven and our 2022 outlook. Given the strong results that we achieved during the first quarter, we are increasing our EBITDA forecast for the year to a range of $1.75 billion to $1.9 billion. Our other assumptions remain unchanged from the information communicated in our February earnings call.
spk04: Operator, we are ready to take questions.
spk05: We will now begin the question and answer session.
spk09: To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Alejandra Obregon with Morgan Stanley. You may now go ahead.
spk01: Hi. Good morning, Orvia. Thank you for the call and for taking my question. Congratulations on the numbers as well. My question is related to Netafim. I was hoping to understand with more granularity what's driving your numbers here. We saw a 14% growth year-on-year. So first off, in terms of demand, what is it that you're seeing in the different regions? And more importantly, in terms of pricing, how should we think of the pass-through of polyethylene here? It seems that it was harder this quarter. So I was just hoping to understand where do you think you have a greater speed to market in terms of your regions? How does pricing typically work in the industry for us to have a better sense here? Really anything that can help us understand growth and what's ahead of you in this division. Thank you.
spk08: So, thank you for the question. This is Jim. In terms of the quarterly results, so we're very pleased. Netafim is really having a great year so far. And in fact, even last year was having a very good year, were it not for the results that we saw in India. You may recall that in 2021, due to COVID impacts in India, the business was challenged there. But even back through 2021, the business was seeing very strong volumes globally. And that has continued into the first quarter of 2022. Again, going back to 2021, you may recall that we were having difficulty given the competitive nature of the business and fully passing through price increases or cost increases as they were presented to the business. We did make progress in that area as we progressed through the year and into the first quarter of 2022. So part of the margin improvement that you're seeing in the first quarter of 2022 is a continuation of passing on the cost increases to that we saw in 2021. We do anticipate that we will continue to make progress in passing those costs through in the second quarter, and believe that by the end of the second quarter, all of the 2021 increases should have been passed through. So, that being the case, we do continue to see some logistic costs increases, and we will do our best to pass those through in pricing as best we can in the upcoming quarter. But there is some continuing cost pressure there. In terms of the ability to raise prices, you know, by region, to a certain degree, you know, there is a competitive element to this business. where it can be challenging. But, again, we are seeing a robust environment and significant demand for the product really throughout the globe, and I should note seeing improvement in India this year as well as compared to what we saw last year.
spk00: Very good, Jim. I think that you've covered it. Essentially, Alejandra, thank you. So the compliments, you know, demand is resilient across the world in NetFM's core segments. And, you know, they've almost caught up on price increases to recover costs. And we are pleased to see India on a path to recovery.
spk01: Thank you. If I may have a follow-up on demand specifically. I remember that there were some large projects that you were hoping to kick in into 2022. Is it those projects that are driving demand during the quarter, or do you think it's more linked to pricing entirely, and how should we think of it for year-end? If you can help us break it down in terms of demand and pricing.
spk00: It's a, you know, Alejandra, it's a mix of both. You know, so demand is fundamentally strong. We are seeing good growth in demand in the Americas, you know, in Europe, you know, recovery in India. You know, demand remains exceptionally strong in Central Asia as well. And so there are some timing issues related to the, you know, timing of government subsidy programs. but none that, you know, concern us at this time. And as we said, you know, NetFM is on a good path to margin recovery, you know, by being diligent about putting cost increases through.
spk01: Very clear.
spk06: Thank you very much, and congratulations again. Thank you. Our next question will come from Luis Garvado with UBS.
spk09: You may now go ahead.
spk02: Thank you. Thanks for taking the question. I have basically two questions here. The first one is about the capital allocation. The company has been able to deliver quite good results and it's more collaborative right now. So I would like to try to address here how should you think about the capital allocation strategy looking forward if you can pitch about dividends slash if they show organic and inorganic growth or even buybacks, how would you consider that? The second one is mostly about the leader in Europe and how you assume, I would say, this conflict between Russia and Ukraine and the lack of, I would say, natural gas in the continent that might affect your businesses looking forward. And if I may, a third one very quickly. In the past, there were some discussions about potentially listing the company in the U.S. Just would like to take the opportunity to check how this plan is basically going right now.
spk00: Thank you. Very good, Luis. You know, let me take the questions here. On capital allocation, you know, as we have consistently said before, you know, Let me start with dividends. You know, you're aware that we have raised our dividend this year in line with the increase in earnings, including a special dividend. And our expectation is we hope to increase our baseline dividend as our earnings grow over the next several years. We will continue to buy back shares, you know, of course, prioritizing growth projects first, and then opportunistically buy back shares at the same levels as we have in the past. And then in terms of, you know, where we will focus going forward, you will hear a lot about our plans on Investor Day on May 17th. And I'm hoping you'll be able to attend in person, Louise. But, you know, what I can share with you is we have line of sight to significantly growing the company, you know, both top line and bottom line over the next several years. And, you know, with the most of the growth coming from organic growth projects. 70-80% of the growth coming from organic growth projects supplemented with selective bolt-on acquisitions. And again, these bolt-on acquisitions, the nature of these should be such that they either address a gap in our geographic footprint or technological portfolio and come with significant growth and synergies. So that's our plan for capital allocation over the next several years, which you will hear a lot about on Investor Day. As far as illegal imports are concerned, you know, we are seeing the situation, we are seeing some improvement in the situation with the attention given to it by the European Union and the authorities, the extent of training at the customs level and the number of seizures that have happened over the past year. At the same time, you know, given the supply chain and logistics challenges coming out of China, the supply of illegal refrigerants has been impacted by that. And then much of these illegal imports were coming through porous borders in Ukraine and Russia and Turkey. And that has been impacted, one, by COVID and by the war that's going on right now. So we are seeing you know, it hasn't come to a stop, but we're seeing reduced levels of illegal imports. You asked a question about the impact of gas on our operations in Europe. You know, we have significant operations at Marl in Germany, you know, where a polymer solutions business has its flagship specialty resins, you know, integrated facility. And we have seen, you know, increases in energy costs that – that we have been diligently passing on to customers through price increases. Having said that, you know, the situation is uncertain. You know, you've seen how, you know, Poland and Bulgaria have been cut off from Russian gas. Now, while that will have a limited impact on us, it's hard to predict, you know, how this war will evolve going forward and, you know, of course, we will monitor the situation carefully. And I think the last question was around a listing in the U.S. You know, look, we keep monitoring that, and it's not, like I've always said in the past, it's not a near-term priority. Having said that, we are open to looking at all options for creating value for our shareholders, and this is not something that we rule out at a certain point of time in the future. But the current focus of the teams will be to focus on value creation on the left-hand side of the balance sheet. And as we go along this journey, we will continually explore options on the right-hand side of the balance sheet that include a potential listing in the U.S.
spk06: Thank you very much. Thank you, Luis. Our next question will come from Diego Serrano with Credit Suisse.
spk09: You may now go ahead.
spk10: Thank you. Thank you for the opportunity to ask a question. Just you mentioned that you expect PBC prices to remain strong going forward. So, in that sense, how are you seeing these PBC prices for this quarter? taking into account that IHS estimates are forecasting a high single-digit sequential increase. Could we see a further upward relation to your guidelines for folio 22 if this price increase were to materialize?
spk00: So that's a very good question, Diego. You know, let me bring you back to, you know, what we've been saying all along. You know, for about, you know, five or six quarters, we've been saying, that there's a fundamental supply-demand disconnect in the PVC industry where demand growth exceeds supply growth. And when industry is running at very high utilization levels, you know, it takes the slightest amount of disruption to send prices upward. Now, what you see going on is, you know, yes, of course, there's an impact of the war in Europe, the invasion of, you know, Ukraine by Russia. And the way that works is you have high oil prices. With high oil prices, you have high NAFTA prices. High NAFTA prices, you have high ethylene prices. And that, you know, works its way into high PVC pricing. And so what we have seen, you know, the same IHS, you know, teams have forecast a decline in PVC prices over the course of this year. But what we have seen is stability at these levels. You know, there may be slight declines you know, coming from, you know, some weakness in demand in some regions and or with the COVID shutdowns in China, you know, there is more product from China finding its way into other parts of the world. But fundamentally, you know, I would point you towards the long-term. And the long-term view still remains that there's a fundamental supply-demand disconnect that will work to keep PVC prices well above pre-pandemic levels. And it takes a significant amount of time to add new capacity, you know, before this will be impacted. And so, you know, all I can say is, you know, we do expect some level of stability over the course of the year. Of course, we are dealing with cost increases. You know, gas prices have gone up in the U.S., so ethane costs have gone up. You know, chlorine is at all-time highs. And so, you know, it's not devoid of challenges, but overall, you know, I would expect, you know, some stability to a slight, you know, decline over the course of the year. And that's reflected in the increase in guidance that we have provided at an RBI level.
spk06: Okay, perfect. Thank you.
spk10: And just a quick follow-up, if I may. You talked about Nesophim's pass-through. Could you remind us for Wavin and for Bestolit, how long is that lag for the pass-through of rising costs through the price, and what can we expect for these margins going forward?
spk00: So, in terms of, you know, Bestolit, you know, we are pretty quick at passing cost increases through, right, whether it's raw material costs or energy costs. And I would say, you know, that time lag is in the order of months. In the case of Vavin, once again, you know, if demand remains strong, they have a very strong ability to keep putting, you know, cost increases through, and they have demonstrated that quite successfully in 2021, and they continue to, you know, demonstrate that in 2022, okay? And the ability to put cost increases through decreases if there is weakness in demand, and, you know, which has not been the case so far.
spk06: Perfect. Very clear. Thank you. Thank you, Diego.
spk05: Our next question will come from Liliana Vellion with GBN. You may now go ahead.
spk03: Hi. Hello. Good morning, and thank you for the call. I would like to share with us more color and price volume mix in polymer solutions. We saw high record PVC prices in November, but sales are really, really strong. So I don't know if you could share volumes and price mix during this quarter. And the second one is in dual line. We saw really strong results in ADA. So I just want to know if maybe there's a new contract or better mix or new client. Just to understand how sustainable is it. Thank you.
spk00: Okay. Yeah, I think your first question was around volumes and polymer solutions. And let me address that at a high level. You remember in 2021, we had the Texas freeze, and that had a significant, you know, impact of volumes during that period. And so, and also, you know, volumes are affected by, you know, planned shutdowns. And so, this year, you know, we entered this year with an expectation of, you higher volumes, you know, simply, you know, from those two effects not being there in 2022. Okay, so that explains, you know, the growth in volumes. And keep in mind that, you know, we are running at very high utilization levels, and given the strong demand, you know, we are able to sell out everything that we can produce. The second question was around – can you please remind me the second question?
spk03: Yeah, sure. Duraline FDA .
spk00: Yes. Now, you know, Duraline, you know, keep in mind last year in 2021, you know, Duraline went through the challenge of putting cost increases through. You know, given the nature of their contracts, you know, they're pretty, they're longer-term contracts. You know, it takes roughly six months to put cost increases through in Duraline, and they have successfully demonstrated that, you know, over Q4 and Q1. And demand is extremely strong. And this fundamental demand growth is supported by, you know, the growth in, you know, cloud computing, 5G telecom, you know, strong demand with the hyperscalers, you know, like the Amazon Web Services, Facebook, Amazon, you know, and Google, et cetera. So this fundamental, you know, strength in demand, which we expect to continue, and that is reflected in the results.
spk04: along with the fact that they've done a good job of catching up on cost increases.
spk06: Perfect.
spk05: Thank you. Again, if you have a question, please press star then 1.
spk06: There are no further questions. This concludes our question and answer session.
spk09: I'd like to turn the conference back over to Samir for any closing remarks.
spk00: Thank you very much. Really appreciate everybody on the call and the thoughtful questions. Once again, I would like to take this opportunity to remind everybody about Investor Day on May 17th from 9 a.m. to 1 p.m. Eastern Time. We invite everybody to attend in person in Boston as much as possible. but if you cannot attend in person, the conference will be available online in a hybrid fashion. We are really looking forward to sharing with you our view on who Orbia is today, how Orbia creates value for customers in their applications, our view of Orbia in the future as it addresses critical world challenges, our capital allocation strategy and how we will create value for shareholders. And I'd love to engage you on Q&A at the Investor Day meeting on May 17th. So once again, it's May 17th, 9 a.m. to 1 p.m. Eastern Time, and either in person or online.
spk06: Thank you very much. Bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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