Aquafil S.p.A. (ECNL) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Aquafil First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Karim Tonelli, Investor Relator of Aquafil. Please go ahead, sir.

Thank you, and good evening to all. Welcome to our conference call. Today, the Board of Directors has approved the group operating and financial results related with the first half of 2020. The main indicator of our financial results at the end of June are the revenue that are equal to EUR 222.7 million, mainly as a result of the demand decline due to the effects of the pandemic in all the areas where the group operates. The EBITDA that, thanks to the countermeasure adopted and the benefit of the activities undertaken in 2019, was equal to EUR 26.9 million. The net result from the EUR 10.7 million of last year is equal to EUR 1.9 million, is a loss due to the impact of the profitability, the significant revenue decrease and the higher amortization and depreciation. The net financial position, despite the full impact of the pandemic, improvement to EUR 242.2 million compared to the EUR 249.6 million at the end of 2019, thanks to the benefit of the activities of increasing efficiency of the net working capital and the investment control. Regarding cash, further liquidity reinforcement to EUR 132.8 million compared to the EUR 90.4 million at December -- at the end of December 2009 (sic) [ 2019 ] and the EUR 100.4 million at the end of March 2020. Now I ask to our CEO, Mr. Giulio Bonazzi to comment our results. Thank you, Giulio.

Thank you, Karim. First of all, and before starting my presentation, let me welcome Beatrice Elisabetta Cugnasca, who has joined our company starting from the 17th of August of this month as new deputy CFO of Aquafil. During more than its 50 years of history, our group faced many tough periods. 2020 would be a recall among one of the most difficult. Presenting the first half 2020 financial results. First, I would like to thank all my people, once again, we found together the right way to come through difficulties. We know very well the strategic path to follow, and this was key to implement a prompt and effective reaction. Our first focus was to protect our colleagues, and our global presence helped us. We could leverage the experience gains since early January in our Jiaxing site, having ensured business continuity with the highest safety standards. At the same time, we promptly implemented countermeasures, and among them, an efficient shift labor management in our site, and we benefited by the savings plans launched last year, too. All this explained by a more than 20% drop of turnover resulted in a limited 30% profitability drop. We worked to minimize negative impact in terms of cash generation, too, having focused ourselves on net working capital management and CapEx discipline. This made us not to burn cash, but even to generate some and to start in this very difficult environment, the process to reduce net debt we envisaged at year start. We strengthened our financial structure, successfully working with our counterparties. Finally, we kept working close to our partner to fulfill their needs and requirement. The results of all these activities and sales recoveries since May have been increasing our visibility in the business, and we would like to share this visibility with you. In July and August, first-grade product sales have been rebounding strongly. And sales drop was around 20% compared to a 40% of the second quarter. Fiber for carpet or BCF in Asia Pacific and fiber for textile or NTF in North America is driving the performance. According for the entire 2020, we are expecting both sales and EBITDA to decrease overall by 20%. We are confident to close the gap between sales and profitability, leveraging on the exploitation of 2019 saving plans, benefits of countermeasures adopted and the positive evolution in the sales in terms of geographical mix we are seeing right now. The net debt reduction process started in the first part of the year will go on. We aim to reach an improvement of around 10% compared to last December. The reaction shown by our group in past months confirm, once again, the strength of our strategy, of our team and of our technologies. Circularity is in our DNA. We have all levers to deploy it, and since years, our activities and our product ECONYL above all, has been showing this commitment. Now this DNA will be reflected in our corporate governance, too. Today, our Board of Directors assigned to the Control and Risk Committee, the supervisor duty on sustainability, changing its name in Control Risk and Sustainability Committee. The connection between sustainability and risk is important. Even more important is the one between circularity, how we deploy sustainability and opportunities. This is driving our future. Thank you. And now if you have any questions, we're ready to answer.

[Operator Instructions] The first question is from Roberto Letizia of Equita SIM.

And as usual, I would like you, if possible, to spend a little bit more words and colors on how the recovery is shaping possibly by regions? And what are the drivers that you see behind that? If there are major differences between the Asia Pacific and the U.S.? If you can tell us something more about the automotive segment? And how it -- how potentially you -- actions in terms of cost management will shape in the second half? And what have you assumed basically for -- in your expectation to arrive at the guidance of the minus 20%, both sales and EBITDA, which assume basically EBITDA margin to stay flat, right, versus 2019, which, I guess, implies some margin recovery during the second half. Can you please just compose this puzzle to let us better understand how the situation is evolving?

I hope to remember to answer to all your questions, Mr. Letizia. So let's try and go with order. Recovery shaping by regions and drivers. What we are seeing right now is a strong rebound of Asia Pacific region, driven especially by China and Australia and New Zealand markets, especially starting from the order entry of June, which is then reflected into the turnover of July and August, we are seeing presently, these areas coming back almost to the level of last year, but with some very good forecast from our customers to continue also during the coming months. Worldwide, one of the strongest rebound that we have seen is driven by automotive. Automotive presently is above our target in China, but also improving strongly both in Europe and United States. Also, residential products are having a similar trend. Where we, unfortunately, are still seeing weaknesses is in the commercial part of the business. Well, it is obvious that if you stay at home, you don't go to the office. If you don't travel, you don't go to hotels. And if you attend to webinars, you are not going to physical conferences. And this, of course, is creating a lack of demand in this particular segment. As the results are saying and as we have already anticipated from the result of the first quarter, we have successfully implemented the cost-saving plan that we announced at the end of 2019. But this is not only the kind of actions that we have taken during this period. Also a strong control, both on variable and fixed cost has been implemented in the first semester of 2020, of course, taking profit of all the possible subsidies available in the different countries around the world. This will continue clearly depending on the level of sales that we will be able to reach also during the second quarter. You're right, we practically expect a second semester EBITDA, which is very similar to the one of 2019. This, of course, thanks also to the implemented saving plan that we have just mentioned. I don't know if I am -- lost something, in case, please, let me know.

No. I guess you've got almost all the points. And just asked, if you can provide more details on how -- what is backing the guidance of minus 20%? So what actually are you expecting? Just to understand if you are more on the conservative side or you feel you are just being reasonable or prudent. Just to let us understand how do you expect the third quarter, for example, to shape at revenue level that would be, for example, a good indication?

Well, it's difficult to give, let's say, more details than the one I have -- we have already given. You know that historically, we normally don't give any guidance. And so this is already an important effort. What we can say is that July and August and September, so the third quarter is, let's say, according to what we have just declared. I mean it would be very surprising if this should not be like that. Depending on the region and on the expectations of our clients, we are seeing a similar trend also for the fourth quarter. What is very difficult to predict is also how the inventories will drive part of the demand because normally, historically, the fourth quarter is suffering weaknesses because of December/Christmas vacation and balance sheet, let's say, needs by our clients. Today, it's still a little early also because of summer vacation to have more knowledge about the actual inventory level of our clients. According to what we can collect in terms of information from the marketplace, presently, for example, in automotive, the inventory level is, let's say, normal to low. So we are not expecting big surprises during the coming months. It is more difficult to give visibility on other segments.

[Operator Instructions] The next question is a follow-up from Roberto Letizia from Equita SIM.

Yes. If there are no question from colleagues, I have some more. Can you give us an update on the U.S. basically? I know it is difficult to say that the ACR are now lagging because you missed the demand, so it's difficult. But can you just update on the productions of the new ACR, if everything is okay right now or still you're experiencing issues in terms of production? Can you just tell us a few words about how Aquafil is performing in this environment? And the perspective that have eventually moved throughout the second quarter for the future of Aquafil? And the last one, on the debt side, I appreciate the fact that working capital is continuing to decrease and that the overall debt is going down. Do you expect similar trend throughout the second half of the year? Can you just provide a bit more detail on the debt side?

Thank you for your question. I will start from the last one. The reduction of the net working capital will continue also during the second part of the year, according to our plan. So we are not -- we are confident to be able to reach all the targets that we have approved in our Board of Directors this January. Regarding ACR, I confirm that the productivity of our technology is approaching our target. We are very close to reach our target. So we have no surprise. This, despite -- because of COVID situation, the possibility to travel of our people is limited. And we are not able, of course, to move people to try to support our colleagues in Phoenix. But as far as today, we have no problem in procuring carpet waste. We have a good productivity level in our ACR, and we confirm the target that we gave at the beginning of the year. There is actually another important factor that I can share with you that starting from July 1, the Parliament of California has approved an increased subsidy on recycled nylon pellets of an additional [ 15 cents ] per pound, which, of course, will help the profitability of our plant and the successful reaching of our target that we gave at end of last year. ECONYL has remained strong during the second quarter. But what is making me happier is the interest that is continuously raising, increasing and the number of contracts that we are signing is continuing also during the period of -- has continued also during the period of the lockdown. You have seen recently the introduction of some new collection by very important luxury brands. And this will continue also during the coming months. In the carpet industry, ECONYL is successfully continuing its penetration in the different part of the world. And so we can confirm at the end of 2020 that our percentage of ECONYL versus the total sales will remain at a high level.

Can we -- yes, yes, please finish off with my previous question, I'm sorry. Sorry, can we start talking -- I know -- I'm sorry about that, but it's really interesting enough that there is no additional big deterioration for 2020. So can we start talking about the drivers of 2021 and beyond the pure recovery. So beyond the true normalization of demand, finger crossed, it will happen in 2021. Can you sum up the potential positive contribution that will arise on normalized conditions from the activity you manage. I don't know if a big part of the savings that you have implemented will be kept also for next year, if -- do you expect any big contribution from recovery in polymers? And just to start focusing and shaping up in really general sense of how 2021 may look like under normalized condition? And this is my last question.

The problem is to understand what will be the normalized condition of 2021.

No, that just means no...

We are comparing different scenarios. And the different scenarios are, of course, foreseeing still a market which will not be normal or better, still, let's say, lower than the one of 2019. And also, let's say, consequent actions of cost reductions, in case, this will be confirmed during the third and fourth quarter of 2020. It is difficult now to give, let's say, accurate or a guidance for next year that is very clear. Clearly, we will try our best in order to keep our costs under control. And beside the cost reduction plan that has been successfully implemented between end of last year and the first semester of this year, we will also try to retain a part of the reduction on the fixed cost that we have been successful to achieve during the first semester of 2020 and also partially that will be repeated in the second part of this year. To give more accurate forecast, at this point, we prefer not to do it.

Just really a very last one. On the commodity side, is this -- is the environment today neutral on the day-to-day business? Is it positively contributing, negatively contributing? Can you just elaborate a little bit on that under the most...

You mean unconventional raw material?

I mean on all price, raw material cost, caprolactam trend and...

What we are seeing right now is a very low caprolactam price. And despite this, as we have always said, that ECONYL will not be -- has not been hit by loss of marginality. But potentially, there could be a strong bounce back on caprolactam price that could take place between the fourth quarter of 2020 and the first quarter of 2021. So presently, all the margins for refiners and for caprolactam people are very little, if any, or negative. From September 1, there have been several announcement of price increase by caprolactam and polymer manufacturers all over the world. Will they be successful? We will see during the coming 4 to 5 weeks.

Our next question is from Martyn Jones of Liontrust.

I just had -- just thinking about ECONYL and that sort of the positive progress that you've had with ECONYL, both in BCF and NTF, what are the long-term implications on the gross margins for the group as this grows as a share of the total revenues of the business, i.e., can you charge a premium? And should there be an expansion of your gross margin over time with that?

Well, thank you for the question. We do believe that ECONYL will retain the interest of the market and that through ECONYL, we will be able to continue our penetration by the customers of the luxury segments or -- and the active sportswear and carpet market. It is our intention as we started last year to start selling ECONYL also in the engineering plastics business. And because of that, we have hired a manager who has been working now in Aquafil already since summer of 2019. And we are seeing already the first projects that are coming alive. It is always dependent on us whether we want or we don't want to charge a premium. This is always depending on the type of product that the customers are requesting. As you can read every day on media, today, the demand for recycled or sustainable or circular product is growing, and the attention of the consumer is getting higher and higher. On top of that, the legislation is also apparently driving the market towards this kind of product. I just mentioned the temporary increase in the subsidization of the nylon recycled polymer coming from the carpet recycling activity. Last year, has just also been published a possibility connected with the recovery fund by the Italian government to lower GAT for bio-based or recycled products. I mean there are several indicators that legislation, customers and final consumers are becoming more and more attractive byproducts that are environmental-friendly and less and less byproducts that are not.

The next question is from Carlo Maritano of Intermonte.

I just have a quick question related on covenants holiday. I see from the presentation that you reached an agreement on the -- in the test on the 30th of June. Are you negotiating with Prudential and Cassa Depositi e Prestiti a similar agreement for the full year?

Yes. Yes, it's clear, Carlo, that we are discussing with the bank with which we have some covenants that -- to prolong this covenant holiday also for the end of 2020. We are working on that, and we are pretty sure that the target will be achieved in time. We don't have any problem about that.

[Operator Instructions]

Yes. Let me also add that we are also working to try not to bridge covenants, as you can imagine. And let's say that if we reach our target, we have also possibilities to be within.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Thank you to all for your time and for joining our conference call, and enjoy your weekend.

Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.