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

Good morning, and welcome to Orbia's Third Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Diego Echave, Orbia's Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Orbia's Third Quarter 2026 Earnings Call. We appreciate your time and participation. Joining me today are Sameer Bharadwaj, CEO; and Cristian Capellino, 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 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. 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 dedication and focus on addressing our customers' needs amidst continuously evolving market conditions as well as extend my appreciation to our customers for their continued partnership and trust in us. Turning to Slide 3. I would like to share a high-level overview of our third quarter 2026 results. For the quarter, revenues of approximately $2.2 billion increased 12% and EBITDA of $332 million increased 12% compared to the prior year's quarter. Orbia's third quarter results reflect the strengths of our businesses amid uneven demand across markets and geographies. The impact of higher raw material, energy and logistics costs, currency volatility and rising interest rates weighed most heavily on rate-sensitive construction and housing markets and on our operations in Europe. At a business group level, Connectivity Solutions captured strong demand from AI data center, telecom, power and electrification investments in the U.S. and Fluor & Energy Materials continue to benefit from solid fluorine chain fundamentals. This diversification allows us to absorb temporary pressures in parts of the business while capturing opportunities in others, supporting more resilient earnings and cash flow across market cycles. Our teams are responding efficiently to rising input, energy and freight costs with disciplined commercial actions while actively managing our supply chains. We remain focused on strengthening the balance sheet through cost optimization, disciplined capital allocation, cash generation and making progress on noncore asset sales. Supported by our clear priorities and the strength of our businesses, Orbia is well positioned to deliver sustainable shareholder value as market conditions evolve. I will now turn the call over to Cape to go over our financial performance in further detail.

Thank you, Sameer, and good morning, everyone. I will start by discussing our overall third quarter results. Turning to Slide 4. On a consolidated basis, net revenues of $2.2 billion increased 12% year-over-year with growth coming from all business groups. EBITDA of $332 million for the quarter increased 12% year-over-year, driven primarily by strong demand and improved product mix in Connectivity Solutions and commercial strength in Fluor & Energy Materials, partially offset by higher costs in Europe in Polymer Solutions and favorable sales mix in Precision Agriculture. Operating cash flow of $245 million in the quarter decreased by $26 million compared to the prior year period, mainly due to higher working capital investments and taxes paid, partially offset by higher dividend. Free cash flow of $130 million decreased by $14 million year-over-year. The decrease was driven by lower operating cash flow, partially offset by lower capital expenditures. Working capital increased by $10 million in the third quarter of 2026 compared to a decrease of $14 million in the same quarter of 2025, reflecting increased business activity as well as the impact of higher selling prices and input costs resulting from the Middle East conflict. Capital expenditures of $79 million in the quarter decreased by $7 million compared to the prior year quarter and included ongoing maintenance spending and investment to support the company's targeted growth initiatives. Net debt to EBITDA decreased from 3.28x to 3.10x compared to the previous quarter. The decrease was driven primarily by a decrease in net debt of $115 million, mainly driven by positive free cash flow and an increase of $37 million in the last 12 months EBITDA. Turning to Slide 5. I will go through our performance by business group. In Polymer Solutions, third quarter revenues were $675 million, an increase of 4% year-over-year. The increase was driven by higher prices in general resins and was partially offset by soft demand for derivatives in Europe. Third quarter EBITDA was $68 million, a decrease of 14% year-over-year with an EBITDA margin of 10.0%. The decrease in EBITDA year-over-year was driven primarily by higher feedstock, electricity and logistic costs, mainly in Europe, partially offset by higher margin in general resins. In Building & Infrastructure, third quarter revenues were $660 million, an increase of 2% year-over-year. Increase in revenues for the quarter was driven by growth in Latin America and the benefit from the pricing actions implemented to offset higher raw material costs during the last quarter, partially offset by soft demand in Europe. Third quarter EBITDA was $79 million, an increase of 4% year-over-year with an EBITDA margin of 12.0%, driven by margin expansion in Latin America as a result of favorable pricing, partially offset by lower volumes in EMEA and the reversal of the timing lag benefit between price increases and rising input costs experienced in the previous quarter. In Connectivity Solutions, third quarter revenues were $373 million, an increase of 47% year-over-year. The increase in revenues for the quarter was driven by continued volume growth, supported by strong demand across the U.S. telecommunications and data center markets. Revenues improved as well, supported by the favorable pricing actions taken to offset higher raw material costs during the last quarter. Third quarter EBITDA increased 68% to $71 million with an EBITDA margin of 19.1%, an increase of 234 basis points. The year-over-year increase in EBITDA was primarily driven by higher revenues, a favorable product mix and high plant utilization. Moving on to Fluor & Energy Materials. Third quarter revenues were $311 million, an increase of 37% year-over-year. Revenue growth was driven by strong volume and the pricing actions implemented to offset the significant cost inflation pressures experienced during the year. Third quarter EBITDA was $89 million, an increase of 39% year-over-year with an EBITDA margin of 28.6%, an increase of 48 basis points. Higher EBITDA results for the quarter were driven by higher revenue, a favorable product mix and the temporary benefit from product life cycle dynamics in part of the medical propellant product portfolio, partially offset by higher raw material costs, primarily sulfur and higher freight costs. Finally, in Precision Agriculture, third quarter revenues were $261 million, an increase of 1% year-over-year, mainly driven by higher project revenues in the Middle East and Africa, continued positive performance in Peru and the U.S. and the impact of pricing actions as a result of higher raw material costs. Third quarter EBITDA of $24 million decreased 21% year-over-year and EBITDA margin decreased by 262 basis points to 9.2% versus the prior year period. The increase in EBITDA for the quarter was driven by an unfavorable sales mix, the reversal of the timing lag between price increases and rising input costs and was partially offset by pricing actions. With that, I will now turn the call back over to Sameer.

Thank you, Cape. Before I comment on the outlook for the remainder of the year, I would like to take the opportunity to inform you that Orbia is rebranding its Building & Infrastructure business group as Orbia Water & Climate Solutions. The new name better reflects the business' evolving portfolio, strategic direction and long-term growth opportunities. It also reinforces our focus on differentiated solutions that advance water security, climate resilience and sustainable living. This direction is already visible in the growth and market traction of indoor climate solutions and urban climate resilience businesses, which demonstrate the potential of our upstream strategy. Orbia Water & Climate Solutions helps customers address some of the most present challenges facing the built environment and water management today. Housing shortages persist, climate impacts are intensifying and aging water systems are under growing pressure. In response, the business serves as a reliable partner in water security and climate resilience, delivering solutions that create value for customers and communities. Turning to Slide 6. I will now provide an update to our outlook for the current year. Based on the results so far and the company's expectations for the remainder of this year, Orbia now expects full year 2026 EBITDA will be approximately $1.25 billion. Orbia remains watchful regarding demand trends for the remainder of this year and will manage operations accordingly. The company reaffirms its 2026 capital expenditures guidance of approximately $400 million with a primary focus on investments to ensure safety and operational integrity as well as selective strategic growth projects, particularly in the Fluor & Energy Materials business group. Now looking ahead in each of our business segments for the coming quarter and the remainder of the year. Beginning with Polymer Solutions, PVC resin prices have moderated as global supply conditions have eased, although expected to remain above pre-conflict levels. Recent oil and coal price increases have provided pricing support. However, near-term performance is expected to be tempered by soft demand and higher input costs in Europe and operational challenges in derivatives in Mexico. The business will remain focused on cost and pricing discipline, operational safety, asset reliability, cash generation and profitability. In Water & Climate Solutions, formerly Building & Infrastructure, the business expects demand conditions will remain challenging, particularly in Europe with ongoing pricing pressure and the normalization of material margins. The business continues to prioritize profitability and cash generation through footprint optimization, new product introductions, cost discipline and working capital management. In Fluor & Energy Materials, the business expects the favorable fluorine pricing and product mix to continue supporting performance, offset by seasonal volume trends, rising raw materials and logistics costs and the absence of the contribution from favorable product end-of-life cycle dynamics in part of the medical propellants product portfolio. The business will maintain its focus on strategic pricing, safe and reliable operations while advancing investments in next-generation medical propellants, mining infrastructure and battery materials. In Precision Agriculture, demand is expected to strengthen as input costs stabilize as well as due to seasonality. The business expects to sustain solid momentum, supported by strong project activity in Africa, continued strong demand in Peru and the U.S., improving conditions in selected markets and the ramp-up of recently launched products. The business will focus on disciplined sales execution, cost management, inventory optimization and cash generation initiatives. And finally, in Connectivity Solutions, the business expects sustained demand growth supported by telecommunications networks expansion and AI and data center infrastructure investment in the U.S. Continued pricing discipline, deeper penetration of higher-value applications and improved plant utilization are expected to support margin expansion and profitability growth. In closing, Orbia remains firmly focused on its strategic priorities, delivering on our guidance, strengthening our balance sheet through deleveraging, simplifying our portfolio around our core strengths and driving stronger cash generation. We expect organic growth, continued execution on our cost savings initiatives and contributions from recently completed growth investments to support these objectives. Together with disciplined capital allocation, these actions position Orbia to strengthen the business and create sustainable long-term value for shareholders. Operator, we are ready to take questions at this time.

[Operator Instructions] And today's first question comes from Ben Isaacson with Scotiabank.

Sameer, I just have one question about your stock. It seems like your stock trades at the lowest multiple of your 5 business lines, which is about 6x on commodity PVC. Many would argue that your integrated fluorspar business should trade at a much higher multiple, probably closer to 9x, give or take. My question for you is, as you continue to allocate significant capital towards growing this business, what needs to be done differently, if anything, for the market to start fully recognizing and rewarding these investments? My concern is that the market will keep giving you 6x for the incremental capital that you're putting to work in a higher multiple business.

That's a great question, and this is something we've struggled with for a long time, right? And even though we've tried hard to explain to investors and stakeholders, our exposure, particularly in the fluor chain to battery materials, semiconductor materials in the future and some of our other exposures, particularly in Connectivity Solutions to the AI data center expansion in our AlphaGary business as well to the AI data center markets, we don't see that reflected in the stock price. And it's hard for me to speculate what the reasons might be. I think we remain focused on executing, delivering results. Our mantra is to say basically deliver results, delever our balance sheet and simplify and focus our portfolio. And as we do that and we begin to contribute more and more earnings from these higher-growth businesses, hopefully, that should be reflected in the stock price as well.

And the next question comes from Alejandra Obregon with Morgan Stanley.

I have actually 2 questions here. The first one is on your Fluorine division as well. I was hoping if you can walk us through the maturity and the rollover profile of your key fluorspar contracts. I mean, as these contracts reset, how should we think about the opportunity to reprice the mineral, particularly given, I mean, it's becoming increasingly critical across multiple end markets. I'm assuming pricing will be strategic here. And then the second one is on the rebranding of your B&I division to Water & Climate Solutions. How much should we really read into this strategic change? I mean, you did mention it is a very better description of the portfolio you already have and the new trends. But what is it really signaling in terms of your CapEx of your backlog of where you want to compete, invest and grow the business? If you can be a little bit more specific about what this means for the strategic thinking of the division.

Thank you, Alejandra. Let me take both of those questions. See, in the fluorine chain, we typically do not comment on our long-term contracts. And in any case, we don't have contracts that go very long term either, given the tightness in the value chain and the leverage that we have. We -- the team is highly focused on getting fairly paid for the value that we create in every product line that we have, right? So the fluorine chain essentially operates in maximizing the value for the fluorine atom, and depending on which product it goes into, whether it's mineral and chemical intermediates, downstream refrigerants and medical propellants. What I can say is this fluorine chain will continue to remain tight as the decade continues, and we will continue to exercise our position in that value chain and be a critical supplier -- be a supplier of critical minerals, particularly in the Americas and to the Western world. Now for Building & Infrastructure, the conclusion we came to is at the end of the day, it's a business that's focused on water security. And we do not only hot and cold, soil and waste, foul water, but we are also providing solutions for indoor climate systems, solutions for urban climate resilience, which includes stormwater management, rainwater collection and reuse, blue roofs, green roofs. And the fact that many of our customers actually care about the sustainability metrics and the sustainable solutions that we provide, particularly as we have a leadership position in Europe and in Latin America, and our strategy has been focused on going more upstream directly to architects, designers and builders. As they think about new projects, these factors are very important to them. And we felt that building an infrastructure did not do justice to communicate the strength of the brand and was the primary factor in rebranding to Water & Climate Solutions.

Got you. And if I may follow up, does that mean that you have new customers for the B&I -- for the Water & Climate Solutions division now? Like, is your backlog starting to look different? Or is it something that you want to target from now on?

I think it's both. And so there are some parts of the world where we are more advanced in terms of working directly with upstream customers. But now, we have reorganized our commercial teams and sales teams to have a strong upstream focus in all parts of the world. And so we are at various stages of building out the connections and that backlog and that portfolio. And this is how we see we can differentiate ourselves by providing a comprehensive suite of solutions as builders and architects look at new projects.

And the next question is Andres Cardona with Citi.

On the simplification thing, we have been hearing about this possibility for already a couple of years. And I wonder if you have any update about this progress if you think you could have news over the short term or if you are facing any unexpected challenge to complete any of the divestitures? And maybe a second question, when looking into 2027, 2028 outlook, if you could help us to have some visibility about the ramp-up of the new projects that you may have, what is the expected EBITDA contribution from these expansions?

Very good. Andres, on the simplification, what I can say is same as before. From a strategy standpoint, we remain committed to simplification opportunities that create value for our shareholders. And these things, as you know, they are protracted efforts and take time. And if and when we have something concrete to say, we will disclose that appropriately along with the stock exchange guidelines. In terms of ramp-up of investments for '27 and '28, I'm pleased to say that we have completed the construction of the medical propellants -- next-gen medical propellants larger-scale plant in the U.K. And as we start the year, we expect to ramp up production as well as sales to key pharmaceutical customers in the respiratory drug space through the course of the year. So that one is going well. The project on LiPF6 is in the engineering phase right now, and we are beginning to look at long lead time items. The time line for the project is to execute that by the middle of 2029. And so far, the project is on track and on schedule. So all the permitting, the engineering and all of the detailed activities that need to happen are happening on schedule. And then, of course, we have smaller projects in the businesses in terms of our downstream businesses, line additions, particularly in Building & Infrastructure, there have been new product introductions. These are ramping up. The Biax actually -- the Biax lines that we implemented in Europe, the Tegra fittings that we have implemented in Europe as well. And then in the U.K., the launch of the G5, Hep2O product line, those are going as planned. And then finally, Connectivity Solutions, every new plant that we built in the last 3 years is operating at high utilization rates, and we are working hard to meet the continuously increasing demand of our customers. And as you can see from the results, that business is doing incredibly well and the demand outlook for that over the next 2 or 3 years is very, very strong, okay? Let me pause there and happy to take any follow-up questions.

And the next question comes from Joao Barichello with UBS.

I have 2 from my side. First, during the release, you raised the full year EBITDA guidance to $1.25 billion. However, this imply a 40% sequential decline in results for the 4Q. My question is, what are the reasons for this decline? In the outlook, you published a more pressure scenario for Polymer Solutions and Building & Infrastructure. Could you provide more details on what caused this? And second, based on the current net debt and the expected full year EBITDA guidance, Orbia would still reach the year-end above 3x net debt to EBITDA. What is the company target for leverage level going forward? And when do you expect it to reach it? That's it from my side.