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 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Karim Tonelli, Investor Relations of Aquafil. Please go ahead, sir.

Thank you, operator. Good evening to all, and thank you to join us for the Aquafil first half 2021 conference call. Before going ahead, let me remind you that this presentation might contain certain statements that are neither reported financial results nor other historical information. Any forward-looking statements are based on Aquafil's current expectations about future events and are subject to risks and uncertainties that could cause results to differ even materially from those expressed in or implied by the statement. For a discussion of these risks and uncertainties, you should review the disclaimer in the presentation we issued today. Now allow me to underline you, which are the main financial highlights of the period before leaving the floor to Mr. Giulio Bonazzi for his strategic remarks. Undergoing volumes recovery, up by almost 3% in the first half and above 5% in the second quarter compared to the same period of 2019. First half 2021 EBITDA in line with first half 2019. Net financial position on the last 12-month EBITDA from 3.7 of December 2020 to 2.6 at the end of June 21, '21. August year-to-date volume up by around 4% compared to the same period of 2019. Now I'm handing over to our Chairman and CEO, Mr. Giulio Bonazzi.

Thank you, Karim, and good evening to all, and thank you again for attending our conference call. Some months ago, I defined 2021 as a recovery year, and I described to you, which were our plans to manage it. Financial highlights Karim just described give a clear evidence of this recovery path. And we are very pleased with our results of the second quarter 2021, which was one of the best in terms of EBITDA margin from the listing of Aquafil of 2017. And this, despite the partial slow recovery of the BCF contract segment, the huge rise of raw material prices only partially passed through in the selling prices of the first half, the ongoing of the uncertainty due to the pandemic situation. The very good results we achieved in the first half confirm once again the improvement activities we started in 2019 continues and partially consolidate the extraordinary actions on costs, working capital and capital expenditure taken to face the pandemic situation that is not over yet. Successfully taking advantage of polymer market's strong dynamics. Corroborate the strong development of ECONYL-branded products in the fashion business. Therefore, considering the month of July and August that are showing even a better result compared to 2019, we are pleased to confirm our improving forecast for the year 2021. And moreover, widening our vision, we launched different projects that will support our future growth. We made engineering plastic polymers again a central element of our strategy. We significantly strengthened our presence in Japan to increase our activities in the market, which in terms of BCF, is the third largest 1 after U.S. and Europe. And the Japanese market features are perfectly aligned with group value proposition. And to serve that, we have established a local organization created partnerships with local manufacturer with finishing yarn facilities and built a combined global team, which can offer group best practices. Moreover, at the group level, we are working to build relationships with important local partners to expand the circular nylon business, especially under the ECONYL brand. We further implemented our strategic path to circularity, closing the loop, as we anticipated to you many times. How? Well, going upstream, integrating ourselves with nylon waste collection and downstream, launching the ECONYL e-platform to involve the end consumers and give them the opportunities to become promoters of circularity. We continue to place at the center of our strategy, the research and development activities as fundamental driver of our future. Let me conclude saying that financial and strategic results achieved in the first part of the year are the base not only for a strong 2021, but for an even stronger group future, which has circularity as DNA. Now we are more than welcome to leave the floor to you and to answer to your questions.

[Operator Instructions] The first question is from Niccolò Storer with Kepler.

I have 3 questions, please. The first 1 is related to polymers. And so I'm asking you which is the outlook for polymers through the end of the year because we have seen a very strong Q2 also in terms of profitability other than demand. And so what are you seeing on polymers into the end of the year? Do you think you will be able to keep this weight of -- to normal polymers on total similar to that also into the end of the year. The second 1 is on your business to the automotive. We have been reading about automakers cutting production due to chip shortages. Again, is this affecting in any way your business, which is your feeling on that. And the last question on the new actions that you mentioned in your presentation, I assume these are actions to further increase again your growth, to accelerating our growth path. So again, if you can share with us what you have in mind also for the future other than what you already did.

Thank you, Niccolò. Polymers. Well, the third quarter still confirms the trend of the first semester. And nothing for the time being at least, is letting us thinking that the fourth quarter will not be, let's say, good as the entire 2021. We believe that could be little better or a little worse, but nevertheless, it should remain a very good year for the polymer business until the end of 2021. Nevertheless, we are not, how can I say, waiting and hanging without taking any actions in order to keep the same good trend also for the year to come. And we are making some investments in order to continue our story in the polymer business in a way that also for the next years, we will be able to fulfill also the potential synergies between the polymer business and the fiber ones. Automotive chip shortages. Well, we have had some problems, especially at the beginning of the year in the United States. For those who have taken part in the first conference call of the first quarter, especially during the month of January, this problem affected strongly our automotive sales in the U.S. For the time being, we are not having a big impact on what is coming from the news. But this is also because, let's not forget, Aquafil is operating in the medium high segment of the automotive sector. So we are not working for the low-end cars, but for the medium, high models, like from the BMW Series 3, the 5 and 7. Mercedes the C-Class and so on and so forth. So our impression is that, let's say, the microchip shortages is impacting less this segment than, let's say, the more commoditized ones. Nevertheless, for the time being, we are having a very good order entry in the BCF business even though the automotive is not super strong. So our belief is that it will continue the present trend also until the end of 2021. New actions. Well, clearly, I cannot tell you all what we are doing because there are some, let's say, strategic investments that are ongoing that should clearly create a good potential for growth. With regard to Japan, I try to give a very clear explanation of all the actions that have taken place already since a couple of years, starting from having our machinery by the largest yarn finishing company in Japan. Secondly, having hired a very high profile manager, Japanese, of course, to deal with our Japanese customers, which resulted in a very positive action, especially during this moment when it was not possible to charter personally to Japan. On top of that, you certainly remember the signing of the memorandum of understanding with the largest Japanese trading company, Itochu. But not only this, there are other very important actions and partners that we are discussing with, both in the BCS and in the textile sector in order to really penetrate especially with our iconic products at the Japanese market. So we are very, very positive about potential development in Japan for Aquafil.

The next question is from Roberto Letizia with Equita.

I would remain, if possible, on the next year investments. And I was wondering if you can give us an indication of what will be the growth in CapEx, not the segment because you said you cannot share, of course, the strategic, but maybe the size of the increase in investment any -- and if this will also include partially the increase of capacity in terms of equity production, for example, to serve that market? I was wondering, going back to the polymer, just wanted to understand the possible upside for ECONYL from these market conditions. But the polymer is very, very good. I was wondering if the polymer, which I think it's now served with your current spare capacity I guess, because the increase in demand has been sudden. So I think you're using spare capacity to serve that segment. I was then asking myself in the marginality, the profitability of the polymer under current conditions is actually the same of selling ECONYL? Or if when the markets will normalize on the polymer side and you think across -- use the spare capacity into the ECONYL market, you will still have some margin room to improve your overall profitability. That may be an additional upside for Aquafil. I was wondering if I'm wrong or right in saying that it is not probably the case or still some update on the margins remain. I would like to understand if the repricing campaign on the commodity upside is going in the direction expected. So if you were -- considering these are difficult market conditions, for everyone, we would say, I'm not sure if you're able to fully pass through all of clients who are asking you discounts. And so if you can just give a sense on how the repricing policy is going. I was just wondering if the plastic shortage and the very high price increase is giving you any possible positive market conditions which you can maybe take benefit from this very high pricing by using your internal ECONYL profit to get benefit from them? And my final question, sorry for that. I have such a long list of questions but I was asking if -- myself if the working capital trend will continue also in the second half because the debt is very good since the beginning of the year, if you expect some reabsorption of the working capital in the second half, maybe due to the stock trends on the high price.

Next year, investment should remain if nothing special or no exceptional, let's say, operations are coming, which honestly are not on the study, at least for the time being, it should remain more or less at the same level of the last couple of years. Please remember that especially during, let's say, the pandemic period, Aquafil has pushed further our R&D investments. So we really made a lot of investment also on human capital. So not only on, let's say, capital expenditures and on fixed assets. There are a series of pilot plants and laboratory equipment that are coming on stream during the next 6 to 8 months, like, for example, the famous demonstration plan for the bio-based Caprolactam that should be operational at the end of year 2021 -- that, I mean, will absorb a lot of R&D capabilities and should return in the long future in a very good business opportunities. So we are not forecasting any special CapEx increase during the next month. And keeping the same value of CapEx, we should also be able to follow the growth in case of, I mean, larger and higher demand by certain areas like -- could be Asia or United States of fibers that I mean, could be coped with some more capacity when needed. Polymers per capacity versus ECONYL. They are 2 different things. When I spoke before about potential synergy between the engineering polymer business and ECONYL and fibers is because it is possible to imagine that there are products that are partially made by molded plastics and also textile part. Like, for example, a chair, just to make a very easy example that is now under development with some customers. The polymer business, when we sell basic polymer, it is made with capacity, which is there since decades or so, even though, of course, every year, we try to squeeze a little bit more, making some small investments of, let me say, improvements in quality as well as in, let's say, capacity because we try to save money here and there. But this is typical of every chemical plant, not only of our polymer plants in Aquafil. When we speak about selling ECONYL and selling polymer, clearly, the profitability of selling ECONYL is far larger than the one-off polymer, even in exceptional good periods like also the present one. I mean, it is not comparable. When we sell ECONYL products, the marginality or even when we sell fibers, normally, our marginality is far higher than the one of the polymer -- the basic polymer business that, I mean, has been pretty strong during the first half of 2021. Repricing campaign, let's not forget that we have a good portion of our business that is formula based. And so we don't see and actually the pass-through of the higher raw material prices has gone during the third quarter period as the contracts are foreseen. So we don't see any problem as we have never had. Shortages of materials, if I got it right, because I mean I'm not sure whether I could perfectly understand your question.

The question was if this -- the issue of the plastics and pricing has exacerbated in the last week. So it is even going higher than what we observed in the last month. I was wondering if this is...

Not really in the nylon business. What we are noticing is a progressive geographical localization of the business. Clearly, there is a shortage of containers, transport costs are soaring to levels that we've never seen to date. And when possible, people, they try to buy local instead of imported material because of very long delivery times and sometimes also because the price is not competitive as it was before, given the higher transportation cost. So we don't see any of this problem in our business at least for the time being. Our raw materials are available.

No, actually, I was looking it on the positive side, not on the negative. Sorry if I didn't express itself. So I was not looking for the downside, potential downside...

And I'm saying that we don't see any change or any exacerbation or any, let's say, difference, I mean, in the last couple of months than we have experienced for the entire 2021. And so we are forecasting a continuation of that situation. What we are seeing, especially in the U.S. market is a progressive shortage of polyolefins that are a natural competitive molecule to nylon for the engineering plastic business, especially in the packaging application. Polyolefin is very short in U.S. and sometimes the tornadoes that are typical of this season are creating problem of production, especially to the Gulf area and its petrochemical plants that are producing the so-called ethylene cracking, which is the basic raw materials for polyolefin volumes. But I mean this has very little impact on our fiber business. It's much more related with the packaging application. So actually, we don't see any problem. What we are seeing is, let's say, a sound business with a typical demand of the nylon engineering plastic application. Working capital of the second half. We have been very, very good in managing the present situation, including, of course, stocks and cost of material on stock. Clearly, having higher raw material prices, we could see a small growth of our inventory. Total cost driven not by more volumes on stock, but by the higher unit price that is, of course, updated according to the raw material at the end of the period. So we don't see any, let's say, bigger increase in working capital because let's not forget that our infrastructure is global, but we try to produce and sell local, not to ship from, let's say, distances, so from Europe to Asia or to the United States, if not to support any growth of demand. So for the time being, our, let's say, local infrastructure are more than able to fulfill the local demand of fibers that we are having.

[Operator Instructions] Next question is from Carlo Maritano with Intermonte.

I just have 1 quick question. I was wondering what is the outlook for the contract business. So what are your expectations for the remainder of the year? And with this potential recovery, where are you in the growth also of ECONYL of course.

Thank you, Carlo. Well, the ECONYL sales in terms of percentage on total sales have returned practically to the level of the pre-pandemic period. So we are back to our normal 36%, 37% of the total fiber sales. Contract business is recovering. There are signs of recovery worldwide. Especially in the U.S., what we have been reported by our customers is a very strong rebound especially during the month of July and August of the contract sector in the U.S., while Europe is coming a little slowly. But this is not bad because if it should rebound too quickly, we would not be able maybe to follow with capacity because at the present moment, we have other businesses like the residential and the automotive that are very good in covering our present production capacity. So we are not unhappy. Clearly, when we sell for the contract applications, our prices are higher and our unit margins are higher as well. So this, of course, is a good buffer of recovery also for, let's say, the next period that hopefully we will be able to see.

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

Well, if there are no more questions, we are, of course, available to any further discussions and request of information as usual. I thank you, everybody, for taking part to the conference call for the second quarter and the first half of 2021 and hope to have the possibility to see you soon, hopefully, in person if you are holding a green pass, of course. Thank you very much.

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