Orbia Advance Corporation, S.A.B. de C.V.

Please note this event is being recorded. I would now like to turn the conference over to Gerardo Lozoya, Director of Investor Relations.

Please go ahead.

Please note this event is being recorded. I would now like to turn the conference over to Gerardo Lozoya, Director of Investor Relations.

Please go ahead.

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.

With that, let me now turn the call over to Sameer.

Thank you, Gerardo, and good morning, everyone. I am on slide three.

First, I want to take this opportunity to introduce Jim Kelly and welcome him into the role of Chief Financial Officer of Orbia. Jim brings over 30 years of global leadership experience and an extensive track record of transforming finance organizations to world class levels.

Second, let me recognize our 21,500 plus associates for their dedication to Orbia and serving our customers despite COVID-19 and a challenging global environment. While the pandemic continues to impact our communities and business, we remain optimistic about the future as vaccination rates improve among our employees working around the world.

At Orbia, we continue to be committed to the health and well-being of our team members and their families. We have implemented rigorous safety and sanitation protocols at all of our sites.

As a purpose driven company seeking to advance life around the world, we have taken numerous steps to improve vaccination rates, including making vaccines available to our teams and communities wherever possible. Let me now provide a high level overview of our third quarter business performance.

I am on slide four. Orbia delivered a third consecutive quarter of impressive results, building on the positive momentum that started in the second half of last year.

Revenues and EBITDA reached their highest levels ever on a trailing 12-month basis, supported by organic growth and gains from our recent acquisitions. EBIDTA growth of 47% year-over-year was driven by strong contributions from VESTOLIT and Wavin.

Their performance more than compensated for the pressures experienced by our other businesses, which were challenged by raw material and other cost increases. Our EBITDA margin of 23.3% improved 118 basis points year-over-year.

As expected, we continue to experience increased costs driven by higher raw material and freight prices, labor shortages and ongoing supply chain disruptions. With these challenges as a backdrop, our diversified portfolio enhanced our results and demand remains very healthy across all our businesses.

We generated strong free cash flow of $90 million during the quarter and with our low leverage ratio, we have significant liquidity available to fund our strategic growth initiatives. We are executing on our growth strategy by investing in geographic expansion, innovation and bolt-on acquisitions across our businesses.

Beyond our remarkable performance in 2021, I am confident that our strategy will sustain our long-term growth and profitability.

As mentioned in the last quarter, we continued to take additional actions to mitigate rising input costs through an effective commercial strategy and inventory and supply chain management. We delivered strong free cash flow of $90 million during the quarter, despite an increase in working capital tied to significantly higher sales activity and higher prices associated with increased raw material costs.

Net debt was $2.8 billion and the net debt-to-EBITDA ratio was 1.48 times, representing one of the lowest leverage levels in years. During the quarter, we also paid the outstanding balance of our 2022 $750 million senior note.

In total, over the past two quarters, we have reduced our average cost of debt to 4.2% and extended our average debt maturity to 14.2 years, with our next significant maturity extending to 2026. Capital expenditures of $73 million were up 69% compared to a low base last year.

In summary, we have a very healthy balance sheet that provides us with broad options to invest for growth organically and by a bolt-on acquisitions, as well as to return cash to shareholders. Now, let me go through our performance by business in more detail.

Please turn to slide six. In Polymer Solutions, we delivered another quarter of exceptional results fueled by strong topline growth and margin expansion.

Revenues were up 67% due to high PVC demand and pricing, which remains at historically high levels from continuing demand in the building and construction markets and limited global supply.

Our view is that announced capacity additions in the PVC supply chain will be insufficient to meet long-term demand creating an environment that is supportive of investments. Finally, Shakun Polymers, in which Alphagary acquired a majority ownership interest in Q2 is performing well, further boosting our results.

Wavin posted another strong quarter, supported by demand in the building and infrastructure markets both in Europe and LatAm. Revenues were up by 32%, mainly driven by higher pricing to offset cost increases.

Market demand normalized compared to an extraordinarily high second quarter level, but remained solid across the footprint in both above and below ground applications. EBITDA totaled $106 million, up 12%, representing a margin of 14.1%.

While we fully recovered cost increases through introducing higher selling prices, our margin percent declined year-over-year due to an unfavorable mix and the inclusion of higher selling prices in the denominator of the ratio. Looking forward, the next two quarters normally represent seasonal lows for volumes.

We continue to take actions to address headwinds related to material availability labor and supply chain disruptions and increases in raw material and logistics costs. Now, let me turn to Netafim.

Revenues increased 22% due to broad-based geographic demand with strength across the U.S., Europe, Brazil and Turkey, more than offsetting weakness in India due to COVID-19. Additionally, the Gakon integration had a positive impact on the topline.

EBITDA decreased by 16% and the EBITDA margin was 12.3%. We have been facing unprecedented levels of cost inflation, particularly in raw materials and transportation for some months now.

We expect demand to continue to remain robust as we continue to see long-term positive trends in local food security and production, as well as global growth opportunities in existing and new markets. Furthermore, prices of most key commodity crops such as cotton, coffee and sugar have risen, driving incremental demand for our products and solutions.

In Dura-Line, revenues increased by 42% due to higher volume and expansions in our geographic sales coverage. Government funding and new projects for fiber infrastructure in the U.S., Canada and some countries in Europe, continued customer demand for our value-added products and more favorable pricing also contributed to our strong revenue performance.

However, EBITDA decreased by 40% and the EBITDA margin was 12.2%, as we continued to see rapid increases in raw material and freight costs. As a reminder, Q2 and Q3 of 2020 were extraordinarily high performing quarters for Dura-Line as we benefited from record setting low costs of resin, lag times and revising prices to reflect the impact of rising raw material costs, extended lead times and a tight labor market have delayed pricing realization actions.

Koura revenues increased by 3% due to strong pricing. This was partially offset by lower volumes in our acid grade fluorspar given lower demand in China.

EBITDA decreased by 16%, resulting in an EBITDA margin of 30.6%, primarily driven by lower acid grade fluorspar volumes, rising raw material and transportation costs, and investments to support the growth of the business. Koura also incurred a one-time unfavorable impact of $3 million from Hurricane Ida during the quarter.

Earlier this month, we announced that Koura let a $70 million funding round in Battery Resourcers, a high potential startup with leading technology for recycling lithium ion batteries. Koura is also working with Battery Resourcers to integrate recycled materials into the battery supply chain.

In summary, we closed another quarter with solid financial performance, continuing our focus on operational and commercial excellence, and adherence to our growth strategy. Let me turn it back to Sameer now.

Thank you. Sameer?

In VESTOLIT, a decarbonization team has been launched with an aim to reduce Scope 1 and Scope 2 emissions at all plants and operating facilities by 5% versus 2020. In addition, we have been successful in reducing our year-to-date solid waste-to-landfill by almost 20% versus 2020.

In Wavin, sales of products utilizing recycled materials continued to increase, zero waste-to-landfill projects were scaled at manufacturing sites, contracts with energy providers were audited for efficiency and the transition to renewable sources is underway, with a target to use 100% renewable energy within two years in our Europe, Middle East and Africa regional facilities. In Netafim, earlier this year we established aggressive growth targets for the adoption of a drip irrigation system in rice.

Rice production is a significant contributor to methane emissions globally, accounting for over 10% of anthropogenic emissions annually. We have made excellent progress in meeting our targets and expect to continue to grow in the coming years.

The Netafim system virtually eliminates methane emissions and groundwater contamination associated with rice production, and reduces the presence of arsenic in the grain by 90%. Netafim also launched a circular business model in Europe.

We have begun reclaiming used drip lines from farmers in the region. We process the reclaimed drip lines and use them for the manufacture of new drip lines.

Our expansion into Europe follows the successful implementation of a similar program in the United States. In Dura-Line, the business completed the installation of solar panels at its Goa facility to generate 1 million kilowatt hours yearly, and increase energy efficiency and cost savings for the plant.

Koura also continued its efforts to scale up and commercialize its medical propellant Zephex 152a, which reduces the carbon footprint of metered dose inhalers by 90%. These products are examples of materials we have launched and continue to commercialize.

Koura has several additional products in its pipeline that will help significantly reduce Scope 3 emissions in the future. Now on to our expectations for the rest of 2021 and capital allocation plans.

Clearly, our businesses are experiencing strong demand and performing well with some performing better than expected. We are maintaining our daily focus on operational and commercial excellence, and investing in digital transformation for long-term value creation.

While the continued impact of COVID-19 is still uncertain, we remain optimistic about the long-term growth fundamentals of our businesses.

We believe that our downstream businesses will recapture the majority of cost increases through pricing initiatives over the course of the year. For the fourth quarter and full year, we continue to expect strong cash generation as global markets continue to recover and additional investments in working capital normalize.

We will continue to prioritize organic growth and strategic bolt-on acquisitions, while maintaining our day-to-day investments in operational excellence and ESG. We will remain disciplined in navigating short-term issues, while coming through to deliver sustainable growth for all those we serve.

Operator, we are ready to take questions.

Hi Nik. This is Jim.

Very nice to meet you. Thanks for the questions.

I will address the working capital one at least. And wehave seen, over the course of the year, I would say, relatively broad based increases in working capital, largely driven by, what wehave seen as raw material cost increases that have driven our inventory costs up, which then translates as well to receivable dollars going up as we increase prices.

Another factor in driving the increase in the quarter was that we have a long-term plan to pay down our letters of credit and that was a significant contributing factor in the quarter as well. So that was a planned decrease in those letters of credit.

Got it.

Thank you, Jim…

Can you...

…and good...

So is a follow-up.

Go ahead, Nik.

Is -- sorry, a follow-up. Is any of this specifically related to Netafim?

Netafim has and the business model can sometimes be somewhat intensive in terms of working capital or is it really not a big issue? Thank you.

No. There is nothing specific to Netafim related to the increase as it relates to other businesses.

Netafim was not an extraordinary driver.

Yeah. Okay.

Thanks.

Got it. Thanks a lot.

Hi, Frank. This is Jim.

Nice to meet you. Look forward to meeting you face-to-face someday.

So on the first question related to the costs and particularly and you asked specifically about Dura-Line and Netafim.

So those have certainly been putting pressure on margins as we have gone through the year. We have done our best to increase prices to try to offset those cost increases, but we have been lagging to a certain degree.

So we have yet to fully catch up as wehave gone through Q3, progress has been made and we are continuing to make progress there. If you go under the assumption that there is a relative sort of stability of costs or slight increases here as we move forward as opposed to dramatic increases, then our expectation is that in Dura-Line we would be pretty close to having fully recaptured, if not more than fully recaptured a lot of these costs as we move forward into Q4 and beyond.

And within Netafim, just because of the nature of the competitive environment and pricing structure, it will take a little bit more time as we go through Q4, Q1 and into 2022 to fully recapture those costs. Hope that answers your question.

So those have certainly been putting pressure on margins as we have gone through the year. We have done our best to increase prices to try to offset those cost increases, but we have been lagging to a certain degree.

So we have yet to fully catch up as wehave gone through Q3, progress has been made and we are continuing to make progress there. If you go under the assumption that there is a relative sort of stability of costs or slight increases here as we move forward as opposed to dramatic increases, then our expectation is that in Dura-Line we would be pretty close to having fully recaptured, if not more than fully recaptured a lot of these costs as we move forward into Q4 and beyond.

And within Netafim, just because of the nature of the competitive environment and pricing structure, it will take a little bit more time as we go through Q4, Q1 and into 2022 to fully recapture those costs. Hope that answers your question.

Yeah. It does.

I will move on to the second one. Okay, Iwill move on to the second one related to the Wavin markets.

So wehave continued to see strength in the markets of Wavin over the course of the year. In Q3, I would say, what we saw was a particularly strong LatAm market and a strong European market.

Although, I would qualify that a little bit by saying towards the end of the quarter we began to see some more competitive challenges in Europe, largely because of a couple of competitors that had claimed force majeure coming out of that and there being more supply available on the European market. So fundamentally, the underlying markets are strong, but the European market has become a little bit more competitive recently and we expect to see that trend continuing in Q4 in the European market for Wavin.

Okay. Has there been any FX issues in terms of pricing in any of those markets with the past...

So the major markets, you may be aware where we have exposure to FX are primarily in Mexico with the euro and in Brazil. So we have seen some impact overall from those exchanges or effect from foreign exchanges whatever over the course of the quarter.

Bottomline impact at an EBITDA level was roughly speaking $5 million for the total business.

Okay. Great.

Thank you very much.

You are welcome.

Thank you, Frank.

We will continue to share additional information as the analysis progresses and as they are able to do so. And Orbia is coordinating with Dura-Line and Orbia will also share additional information as it becomes available.

We will continue to share additional information as the analysis progresses and as they are able to do so. And Orbia is coordinating with Dura-Line and Orbia will also share additional information as it becomes available.

Okay. Thank you, Jim.

You are welcome.

Hey. Good morning, everyone.

Jim, congratulations on your new challenge and hope to meet you soon. Two questions from my side, when looking at your expectations or outlook for 2022, has it changed for -- since the second quarter conference call?

It seems PVC margins remain very strong also, I would like to understand if higher gas prices could hurt margins eventually, understanding that the margins are a function of several components. But I would like to understand if your outlook for next year for Polymer Solutions in particular have changed for good or maybe for bad?

And the second one is, Gas Orbia generate very strong cash flow year-to-date and the outlook at least in our view remains very strong. What should we expect from Orbia in terms of capital allocation, are you evaluating M&A opportunities?

And maybe the last one very short is, last conference call you mentioned the possibility to an Investor Day, have you make any progress on that front, are you getting close to engage in a potential date for that event? Thanks…

I will start…

… and congratulations for the results.

Andres, good morning. This is Sameer.

So, first of all, I really appreciate your coverage of the company and continue to be impressed with your understanding of the business and thank you for that. To address your first question on the outlook for Polymer Solutions for next year and-- yeah, so let me address it in a couple of different ways.

So, first of all, we follow the same market publications that everybody looks at. And if you look at the outlook out there from the market publications, they are forecasting a softening in PVC prices next year, increase in gas prices and so, of course, we base our projections and estimates on those numbers as well.

Long-term I have always maintained that this industry has been massively underinvested in over the past decade and the rate at which supply will come online or the supply will be added is much slower than the rate at which the market is growing.

Long-term I have always maintained that this industry has been massively underinvested in over the past decade and the rate at which supply will come online or the supply will be added is much slower than the rate at which the market is growing.

Your second question was on capital allocation. So today, as you can all see, we are -- we have a very healthy balance sheet, a good amount of cash on the balance sheet, relatively low leverage.

And as I had indicated before, from a strategy standpoint, we have made a choice to focus on value creation.

But as you rightly surmised, we are going to be in investment mode from a capital allocation standpoint, while we maintain our healthy dividend, and then, of course, priority will go to growth investments. But as we see opportunities, we will continue to buyback stock at the same time.

So, hopefully, that gives you clarity on capital allocation. And then the final question, I think, Jim, can address your last question.

Yeah. And the question regarding Investor Day, we are in the midst of beginning -- planning that at this point.

So we expect to be holding one in the spring and you should see a save the date coming out somewhere within the next couple of months, certainly by the end of the year.

Thank you both for the very accurate answers and congratulations again.

Thank you, Andres.

Hi, everyone. Luiz here.

Can you hear me?

Yes. We hear you.

Hi, Gustavo.

So, basically two questions if I may, Sameer, Jim. Thanks and thanks for taking the questions and congrats on the results.

Two questions for me, if I may come back to the capital allocation, so you should correct me from your lessons here, you are probably going to use the sort of around you balance sheet and the cash generation to do, actually, how I can say, small movements in each of the second tranche, you can continue to do buyback, you can continue to pay healthy dividends, do potentially organic and inorganic acquisitions, is that correct? And if yes, what kind of returns are you looking into a potential M&A and organic growth?

And also on this front, geographically speaking or even from a product line perspective, would you consider direction to go to a new product lines or different businesses or should we expect something more related to the business lines that you already have? And the second question is, if you can provide some kind of an update on the idea going forward, so floor into Europe, there has been a quite of a challenge over the past couple of years, so just would like to hear your thoughts on that?

Thank you.

And to give you a flavor, we have good organic growth projects across all of our businesses and I can give you multiple examples, where the EBITDA you would get at maturity, we are essentially getting EBITDA for 1 times to 3 times, right?

You asked a question on illegal imports and what I can say is our concerted efforts along with the other industry participants working with the European Union and SAFIC and the customs authorities and the enforcement authorities in Europe are finally beginning to bear some results where there have been multiple reported seizures, fines imposed, the better training of the customs officials, they are catching more and more of these illegal import shipments.

Yeah.

And was there a third question, Gustavo, did you had?

Great.

Thank you.

Yeah.

Okay. So, Jim, do you want to give some color on the near-term?

So, overall, at the Orbia level, sequentially, EBITDA declined by $28 million, essentially the margin percent related to that went from 25% down to 23%, with the primary reason being an ongoing squeeze in margins that was driven by continued increases in raw material and transportation costs, as we discussed.

So, overall, at the Orbia level, sequentially, EBITDA declined by $28 million, essentially the margin percent related to that went from 25% down to 23%, with the primary reason being an ongoing squeeze in margins that was driven by continued increases in raw material and transportation costs, as we discussed.

And then also if you look at just the inflation of revenue through passing price increases through, naturally, the denominator of the equation of EBITDA to sales goes up and that had a 50 basis point impact on the margin quarter-to-quarter. On some of the businesses, so looking Polymer Solutions in particular, EBITDA increased by $16 million sequentially.

As you have heard from Sameer, the market continues to be strong. Just a reminder as we look forward on that business, while we do expect the market to continue to be strong and pricing to continue to be in a favorable environment, Q4 is generally a seasonally slower quarter for that business.

So as you are looking at your models for Q4, just keep that normal seasonality in mind. Koura decreased by $18 million sequentially and that was really due to the acidspar volumes.

Again, very difficult to compare those necessarily period-to-period, but it was within that one small portion of the business that we saw the decrease in volumes. I will say that those volumes and the underlying prices appear to be improve -- improving as we go into Q4.

So we would expect to see an upward trend in that part of the business as we go through the remainder of the year. Within Wavin, EBITDA decreased by $34 million sequentially.

So we talked there about the tightening market situation with some of the competitors exiting their force majeure situations. Overall, however, the market remains very strong for Wavin and particularly in LatAm.

Looking at Dura-Line, there we had an improvement in EBITDA from Q2 to Q3 by $2 million, very strong market demand and improvements made later in the quarter and recovering the cost increases, as I mentioned previously. Strong demand and continued recovery of cost increases are expected to continue in Q4 and into 2022.

Lastly on Netafim, EBITDA declined by $17 million sequentially and that was really due primarily to ongoing market challenges in India related to COVID, as well as the impact of increasing raw material and transportation costs that we discussed earlier. Outside India, the market continues to be very strong and we expect to gradually recover the cost increases that we have seen over the upcoming quarters.

So, hopefully, that provides a little bit of perspective for you both on the sequential Q2 to Q3, as well as what we are expecting to see as we go into Q4 and the remainder of the year here.

Thank you, Jim. And I think, again, this is in the spirit of being as transparent as possible with our analysts and our investors, so that they have a better understanding of the company and its strategy.

Let me close by reinforcing that we are building an organization aligned to deliver strong long-term growth. We remain focused on meeting and exceeding demand to providing sustainable solutions, driving for commercial excellence in everything we do and improving our cost position to generate greater cash flow.

We are proud of the performance of our global team and continue to be optimistic about the future. Thank you very much.