Good morning, and welcome to the Orbia first quarter 2022 earnings results. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference to Sameer Bharadwaj, CEO. Please go ahead.
Thank you, operator. Good morning, and welcome to Orbia's first quarter 2022 earnings conference call. We appreciate your time and participation today. Joining me are Sameer Bharadwaj, 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 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. With that, let me now turn the call over to Sameer.
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 17, 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 totaled MXN 2.6 billion, up 36% versus the prior year, and EBITDA totaled MXN 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 MXN 198 million to MXN 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 Foosung and the mayor of Kędzierzyn-Koźle, 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 Verdagy, a green hydrogen-styled 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 Verdagy's technology.
I would now like to turn the call over to Jim to go through our detailed financial performance in further detail. Jim?
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, net 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 to year-end 2021.
Capital expenditures of $101 million were up 89% in 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 x. 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 PVC market to remain tight in the coming years, with global demand outpacing supply.
For Building and Infrastructure, we continued to see solid growth in both Europe and Latin America. Revenues increased 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 mix shift to value-added products. This quarter includes the contribution of the Vectus 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.
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 3 emissions, reducing the environmental footprint of our products. During the first quarter of the year, we published Orbia's thirteenth 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 3 emissions, by 30% by 2030. With this aggressive target, we position ourselves as one of very few companies worldwide to actually set a Scope 3 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-$1.9 billion. Our other assumptions remain unchanged from the information communicated in our February earnings call. Operator, we are ready to take questions.
We will now begin the question and answer session. To ask a question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Alejandra Obregón with Morgan Stanley. You may now go ahead.
Hi. Good morning, Orbia. 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-over-year. First off, in terms of demand, what is it that you're seeing in the different regions? More importantly, in terms of pricing, how should we think of the passthrough of polyethylene here? It seems that it was harder this quarter. 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.
Thank you for the question. This is Jim. In terms of the quarterly results, we're very pleased. Netafim is really having a great year so far. 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. 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 in 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. Part of the margin improvement that you're seeing in the first quarter of 2022 is a continuation of passing on the cost increases 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. That being the case, we do continue to see some logistic cost increases, and we will do our best to pass those through in pricing as best we can in the upcoming quarter. 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. Again, we are seeing a robust environment and significant demand for the product and really throughout the globe, and I should note seeing improvement in India this year as well as compared to what we saw last year.
Very good, Jim. I think that you've covered it essentially. Alejandra, thank you for the compliments. Demand is resilient across the world in Netafim's core segments. They've almost caught up on price increases to recover costs. We are pleased to see India on a path to recovery.
Thank you. If I may have a follow-up on the back of 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 from your end? Anything if you can help us break it down in terms of demand and pricing.
It's a, you know, Alejandra, it's a mix of both. You know, demand is fundamentally strong. We are seeing good growth in demand in the Americas, you know, in Europe, recovery in India. You know, demand remains exceptionally strong in Central Asia as well. There are some timing issues related to the timing of government subsidy programs, but none that concern us at this time. As we said, Netafim is on a good path to margin recovery, you know, by being diligent about putting cost increases through.
Very clear. Thank you very much, and congratulations again.
Thank you.
Our next question will come from Luiz Carvalho with UBS. You may now go ahead.
Hi, Sameer Bharadwaj, Jim Kelly, and Alejandra Obregon. Thank you. Thanks for taking the question. I have basically two questions here. The first one is regarding capital allocation. The company has been able to deliver quite good results, and it's not elaborate right now. I would like to try to address here how we should think about the capital allocation strategy looking forward. If you can touch about dividends slash potential organic and inorganic growth or even buybacks, how would you consider that? The second one is mostly about the illegal imports in Europe, and how you assume, let's 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.
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. Thank you.
Very good, Luiz. 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. 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.
In terms of, you know, where we will focus going forward, you will hear a lot about our plans on Investor Day on May seventeenth, and I'm hoping you'll be able to attend in person, Luiz. You know, what I can share with you is we have line of sight to significantly growing the company in both top line and bottom line over the next several years. You know, with most of the growth coming from organic growth projects. You know, 70%-80% of the growth coming from organic growth projects supplemented with selective bolt-on acquisitions. 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.
That's our, you know, 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 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, you know, the supply of illegal refrigerants has been impacted by that. Then, you know, much of these illegal imports were coming through porous borders, you know, in Ukraine and Russia and Turkey.
That has been, you know, impacted by COVID and by the, you know, the war that's going on right now, right? We are seeing, you know, it hasn't come to a stop, but we are 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 our Polymer Solutions business has its flagship specialty resins, you know, integrated facility. We have seen, you know, increases in energy costs 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. You know, of course, we will monitor the situation you know carefully. I think, you know, the last question was around a listing in the U.S. You know, look, we keep you know monitoring that and, you know, it's not, like I've always said in the past, it hasn't, it's not a near-term priority. You know, having said that, we are open to looking at all options for creating value for our shareholders. 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.
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.
Okay. Very clear. Thank you very much.
Thank you, Luiz. Yeah.
Our next question will come from Diego Serrano with Credit Suisse. You may now go ahead.
Thank you. Hi, Sameer, Jim, Gerardo. Thank you for the opportunity to ask the question. Just, you mentioned that you expect PVC prices to remain strong going forward. In that sense, how are you seeing these PVC prices for this quarter, taking into account that IHS estimates are forecasting a high single digit sequential increase? Could we see a further upward revision to your guidance for full year 2022 if this price increase were to materialize?
That's a very good question, Diego. You know, let me, you know, bring you back to, you know, what we've been saying all along. You know, for about 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. When the 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 Ukraine by Russia. The way that works is you have high oil prices. With high oil prices, you have high naphtha prices. High naphtha prices, you have high Ethylene prices.
That, you know, works its way into high PVC pricing. What we have seen, you know, the same IHS, you know, teams had forecasted decline in PVC prices over the course of this year. 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. Fundamentally, you know, I would point you towards the long term. 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.
It takes a significant amount of time to add new capacity, you know, before this will be impacted. 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, the gas prices have gone up in the U.S., so ethane costs have gone up. You know, chlorine is at all-time highs. You know, it's not devoid of challenges. Overall, you know, I would expect, you know, some stability to a slight, you know, decline over the course of the year. That's reflected in the increase in guidance that we have provided at an Orbia level.
Okay. Perfect. Thank you. Just a quick follow-up, if I may. You talked about Netafim's pass-through. Could you remind us for Wavin and for Vestolit, how long is that lag for the pass-through of rising costs to the price, and what can we expect for these margins going forward?
In terms of, you know, Vestolit, you know, we are pretty quick at passing cost increases through, right? You know, whether it's raw material costs or energy costs. I would say, you know, that time lag is in the order of months. In the case of Wavin, 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? 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.
Perfect. Very clear. Thank you.
Thank you, Diego.
Our next question will come from Liliana De León with GBM. You may now go ahead.
Hi. Hello, good morning, and thank you for the call. I would like to. If you could share with us more color on price volume mix in Polymer Solutions. I mean, we saw high record PVC prices in November, but sales are really strong. I don't know if you could share volumes and price mix during this quarter. The second one is in Dura-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 and just to understand how sustainable is it. Thank you.
Okay. Yeah, I think your first question is around volumes and Polymer Solutions. 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 on volumes during that period. Volumes are affected by, you know, planned shutdowns. This year, we entered with an expectation of higher volumes, simply, you know, from those two effects not being there in 2022. Okay? That explains, you know, the growth in volumes. 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.
Can you please remind me the second question?
Yeah, sure. Dura-Line EBITDA results.
Around Dura-Line. Yes. Now, you know, Dura-Line, you know, keep in mind, last year in 2021, you know, Dura-Line went through the challenge of putting cost increases through. You know, given the nature of their contracts, you know, they are pretty, they're longer term contracts, you know. It takes roughly six months to put cost increases through in Dura-Line, and they have successfully demonstrated that, you know, over Q4 and Q1. Demand is extremely strong. 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 Amazon Web Services, Facebook, Amazon, you know, and Google, etc .
This fundamental, you know, strength in demand, which we expect to continue and that is reflected in the results, along with the fact that they have done a good job of catching up on cost increases.
Perfect. Thank you.
Again-
Thank you, Liliana.
If you have a question. Again, if you have a question, please press Star then one. There are no further questions. This concludes our question and answer session. I'd like to turn the conference back over to Sameer for any closing remarks.
Thank you very much. You know, really appreciate everybody on the call and the thoughtful questions. You know, once again, I would like to take this opportunity to remind everybody about Investor Day on May seventeenth from 9:00 A.M. to 1:00 P.M. Eastern Time. You know, 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 know, our view on who Orbia is today, you know, 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, you know, how we will create value for shareholders.
I'd love to, you know, engage you on Q&A at the Investor Day meeting on May seventeenth. Once again, it's May seventeenth, 9:00 A.M. to 1:00 P.M. Eastern Time, and either in person or online. Thank you very much. Bye-bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.