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

Good afternoon. This is the conference operator. Welcome, and thank you for joining the Aquafil First Half 2022 Results Web Call. [Operator Instructions] Now I would like to turn the conference over to Karim Tonelli, Investor Relations. Please go ahead, sir.

Thank you, operator. Good evening to all, and thanks to you for joining our conference call on the first half result. 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 expectation about the future events and are subject to risks and uncertainties that could cause result to dive from those expressed by the statement. For a discussion of these risks and uncertainties, you should review the disclaimer in this presentation we issued today. Say that, allow me to leave the floor to Mr. Giulio Bonazzi for this strategic remarks.

Thank you, Karim, and good evening to all, and thank you again for attending our web call. This was yet another half year of extreme volatility, which was nonetheless highly satisfactory. I'm very happy with the work done by my team. We increased revenues and EBITDA by around 30% over the same period of 2021, achieving our best result of all time. The performances of our target markets differed greatly during this first 6 months. In EMEA, fiber demand was in line with 2021. Demand for polymer, which last year had reached truly exceptional levels was less strong. In addition, the cost of raw materials and energy continued to rise sharply, but we were able to recover it almost in full. In Asia as well, demand was also less robust than in 2021. There were 2 reasons for this. The volumes sold in the residential sector in Oceania declined and the Chinese locked down slowed domestic demand. By contrast, growth on the Japanese market remain robust. An excellent performance was achieved in the United States where demand rose considerably due to the withdrawal of a direct competitor from the textile flooring fiber market. Important results were also achieved by ECONYL branded products. The volumes sold in the half year set a new record, up nearly 64% over the same period of 2021 and accounting for 42% of revenues generated by fiber. I am also very pleased to announce 2 new projects, both of which are important to continue the constant growth of ECONYL-branded products. The first is the incorporation of Aquafil Chile, founded to increase availability of raw materials for the ECONYL regeneration process and which will also handle the recovery of fishing nets. The second is the foundation of Bluloop, a benefit company whose main purpose is to sell Econyl-branded products to end consumers through e-commerce channels. As for the future, given the current international scenario, the evolution of each of the various geographical areas needs to be analyzed one by one. In EMEA, cost and in particular, those of energy continues to rise sharply. As in the first half of the year, we are now continuing to implement selling price adjustment measures to recover costs and protect unit margins. However, this cost level is having its effect, resulting in a slowdown in the end demand. In the other 2 geographical areas, energy costs are not at all following the same trend as in Europe. In Asia, Oceania, the market is showing sound demand levels due to an excellent performance of the Japanese market and the partial recovery of the residential market. In the U.S., volume growth remained strong in the first half of the year. We, therefore, expect the second half of the year with less brilliant results than in the first one that just come to an end. In any case, profitability expectations for 2022 remain good, exceeding those of 2021. All this is due to competitive advantage that the market attributes to ECONYL-branded products as well as to the different geographical distribution of the group's markets. Thank you.

Sir, are you ready for the Q&A session?

Yes.

[Operator Instructions] The first question is from Niccolo Storer of Kepler.

Yes, I have a few. The first one on markets. So first on the U.S., if you can comment on which are the market trends, net of the market share that you are gaining from INVISTA withdrawal. So net of that, how is the market performing? And secondly, on Europe, if I understand well, you are seeing -- after a stable H1, you are foreseeing a softening of demand on fiber side for the second part of the year, is this right? Second question is on the potential acquisition in India, which you have announced a few days ago. So if you can comment about the rational of this deal and whether this can be, in a way, helpful to serve the European market or the Asian market or both? And the last one, I would like to go back to input price increases. And so I was wondering if you are facing difficulties or not in passing these increases to final prices? And if the behavior in this respect of your clients have changed with, clearly changed level of price increase that you are proposing to them?

U.S. market trends, net of the market shares that we are gaining from the withdrawal of INVISTA. What we are noticing right now is that the automotive market is getting better. So it seems that the situation of microprocessors and other ingredients that were causing continuous stop and go of the automotive production lines in the United States are now getting a little better. And with this, we are having some better orders inside our system in the United States. The commercial market, so the market tiles that is going for office and large users is definitely staying strong. So there are no signs of a slowdown. Of course, this market was picking up after the big dive that it suffered during the COVID period. The residential market in the United States is not our market, but as far as we can see and learn from, let's say, the numbers that are published by the CRI, which is the Carpet and Rug Institute of United States is definitely slower than it was last year. This is easy to understand. Clearly, people while staying at home and not having possibilities to spending money for going out or having vacation or going to, let's say, buying other products and services, they were refurbishing their homes. Now clearly, they are preferring to spend money for other reasons. So in our applications, what I can say, the market remains, let's say, positive, and of course, on top of that, we are also enjoying the withdrawal of INVISTA, which will show most of the effect during next year because this year, they finally decided to stop, they stop, and now they are practically finishing the stocks that were in their warehouses. India. Well, of course, I remember that we have signed a nonbinding term sheet and we are now in the, let's say, due diligence phase to understand whether we can conclude this deal. The rationale is the following: India is representing today the country in the world with the largest population and still having a lot of space for domestic growth, but also having people and having good labor cost that can permit to stay competitive in the marketplace. The company we are discussing and the people we are discussing is making nylon polymers and nylon fibers and having also space and room for enlargement of this production capacity. The polymer market in India is exceeding the local polymer capacity. So there is a lot of import that is mostly coming from Asia or eventually, but not, of course, in these days because of the energy situation in Europe may also come from Europe. We believe that once and if we conclude the acquisition, we will be able not only to better serve the local market, but also eventually to cover part of our needs in the rest of the world with polymer coming from Asia, which is definitely more cost competitive than the 1 that we are currently producing in Europe because of the present situation. Serving Europe, serving United States. Well, India is geographically very well located to several markets, not only Asia, which, for example, for our ECONYL products is a market that is growing very fast, serving the Middle Eastern area like Saudi Arabian market, the Emirates and other countries of the region, serving also part of Africa, like unfortunately, at Ethiopia, which is now still seeing a war inside between Tigray and, let's say, the government of [indiscernible], but also serving Europe. So we believe that India will represent a good platform for the future. If, of course, we are able to conclude this acquisition. Difficulties in passing through price increases. Well, as you can imagine, when you go and buy your customers, and you ask for another price increase, nobody is, how can I say, cheering at us. But on the other side, the raw material prices are normally accepted without many discussions. Now we are asking, let's say, a kind of another surcharge because of the present energy situation. That will be temporary in the sense that if, and when, the energy market will return to a more normal level, we will also return this surcharge to the customers. We are not seeing, let's say, similar situation in the marketplace between [indiscernible] and textile. For the time being, we are not seeing in the Continental European market any slowdown of the textile market, especially on the economy products. We are not seeing particularly any slowdown of also the commercial carpet market, some but not definitely something that is very considerable. We are seeing some slowdown in the residential carpet market exactly for the same logics that I have explained for the American market.

The next question is from Roberto Letizia from Equita SIM.

A brief follow-up on the input cost. So actually, just wondering if well, from a qualitative point of view, do you feel it is more difficult versus the last month or it is the same to achieve the input cost increase? And actually, as you pointed out, a significant difference in the energy impacts in the market that you are present. I was wondering if you're observing a displacing of the order from different regions, which may take some pressures on demand from the other sourcing of your material and polymer throughout the world? And just a brief comment on the acquisition -- on the potential acquisition, sorry, in India, if. You can give us an idea of what do you expect in terms of debt impact of this feel, in case it is going to happen, if it's going to be very expensive, how do you -- are you going to finance it? And what kind of the debt impact you're going to look for that kind of acquisition? And finally, on the overall profitability of the second half, if you can just spend really a few words on -- how do you expect that to evolve? And so that you see, of course, a retracement but actually, what do you expect versus 2021? If you can just add any other element, which can give us an idea of what do you expect profitability to be in the second half?

Well, the energy market differs widely, depending by regions and depending also by country. And also, Aquafil is having, let's say, hedging somewhere and not somewhere else. So what I can say is that, of course, if this new spike in energy prices didn't take place, we would have been super happy because we have reached a new equilibrium in the marketplace. Price increases were accepted. Customers we are not unhappy with the demand and the market sentiment and the market feelings. So clearly now, we will have to evaluate whether this new round of price increases will create some kind of disturbance to the market. We will learn it quickly. Presently, the order entry of July, August for September has been slower than expected in July, but regular in August. So we are not expecting any crash or a big impact in the market. Also, please remember that today, Aquafil split from turnover, I mean, geographically, is giving us some advantages because our exposure to the European market is getting lower and lower. And let's say, the market that we are gaining and the growth that we are gaining outside of Europe is, how can I say, averaging the situation of Europe, both, of course, in terms of demand and even better in terms of profitability, where, of course, in the rest of the world, we are not seeing what we are seeing in Europe. So I'm now trying to answer to the third question, and then I will come back to the second one. You know that we don't give guidances, if not in very special situations like the 1 of 2020 with the COVID situation. We are expecting some slowdown, but nothing, let's say, creating any tragedy. Clearly, the first semester was extremely positive. So what we are just saying, please do not expect to double this first semester financial results. Also historically, our second semester because of the summer period and because of December, it's traditionally having, let's say, 1 month less or so. So we are expecting some slowdown, but nothing, say, tragic. And definitely, we would be surprised if we didn't score a much higher result than the one of last year, okay? Is it expensive at the potential acquisition in India? Well, when you buy, it is always expensive and when you sell, it is always cheap. We believe that we must see this move in the long term. Clearly, we are trying to buy this company according to the last 3 years' financial result average, okay, where they -- when they had some years with very good result, other with less good results. But what I can say is that Aquafil is counting to this Indian project as the platform for a substantial growth in the future. When we went to Slovenia back in 1995, we acquired the company that was evaluated very expensive. I don't want to repeat the word of my father when I showed him the plant and the money we were spending, but we tenfold or more the turnover of the company in a few years. So Slovenia is 2 million inhabitants, of course, working in market Europe, which is about 400 million people or so. India is 1.3 million or 1.4 million people in a market which is growing at a pace that is definitely higher than our one. So we believe that from India, we can get results even better than the 1 we have got in China. This will also help, of course, to divide the risk, the country risk because we love being in China. We are very happy with our Chinese mates, with our Chinese team, we are very happy with our results and growth in China. But on the other side, being in India can help us also to, how can I say, divide eventual problems that you may suffer. I'm not referring specifically any political problem, but just about COVID. We are not able to go to China since January of 2020. because of travel restrictions, you can go to India without even making a COVID test, if you like it.

A very quick follow-up, if I can, very quickly. In some of the calls we had in the past and we discussed the fact that you actually have excess capacity available on ECONYL side. So basically, you have market space to increase your quarter, which has actually happened quite significantly in the last month, considering the level of incidence of ECONYL total fiber sales. I was wondering if that still the case. So if you still have capacity utilization to be allocated to ECONYL productions in order to further increase? Or if you've reached the level where you also need some investments in capacity expansion?

Well, for those who read our nonfinancial declaration, we pledged to arrive to around 60% of our fiber turnover for 2025, reaching this level. That means that in 2025, we will have 60%. But at the end of 2025, we expect possibly to exceed 60% of our fiber sales, of course, keeping the same perimeter. I tried to explain. If, of course, we buy India, we will add capacity that is not ECONYL presently, but we will see in the future. So according to our plan, we are now preparing ourselves with waste collection, waste preparation and ECONYL depolymerization capacity to be ready by the end of 2023, beginning of 2024 because the capacity which is presently installed is capable of meeting demand for the next, let's say, 18 months or so. After than that, if we don't increase capacity, we could risk to have some shortage to supply the market with ECONYL but we are still in time. That is why we went to Chile. That is why we are implementing a lot of other activities in order to get more waste because, of course, the technology, which has continuously improved is already there and running well.

The next question is from Gianluca Pediconi of MOMentum Alternative Investment.

Roberto and Niccolo asked most of my questions. But what I would like to understand is, first off, behind the strong growth that we have been experiencing in ECONYL over the last few quarters is more a push by Aquafil or a pull by your customers? That is the first question. The second one, Giulio, you probably already mentioned answering Roberto. Can we imagine in your vision sometimes in the future that India may be as it was is Slovenia, a kind of new hub for ECONYL, so if you can elaborate about this, I would be very much appreciated. And congrats again for the Q2 results.

Thank you Gianluca. Push and pull, clearly, we try always to present ECONYL as a possible solution for those who want to decarbonize and to improve the carbon footprint and the recyclability of their products. I must say that for the time being, we are still very much demanded. So we are contacted by potential customers that they want to investigate that they call us that they ask us to go and visit to make presentations and then, of course, the rest is following. So we are still not in the need of pushing ECONYL sales. It's still the easiest part. If we pushed it, as you can imagine, I mean, right now with the present raw material market in Europe, we could also easily push ECONYL sales and giving also interesting solutions to our clients, we could grow even faster. But we are trying to grow organically according to our planning, which is, I believe, the best one. About India, it's very early now to say. What I can say is that we are presently collecting more and more waste in India. There are a lot of opportunities. The market is growing. Let's not forget that nearby India, we have Srilanka and Bangladesh that are 2 countries that are quite successful in terms of garment manufacturing. So being in India, it may be in the future, a good option like was 20 or 25 years ago, going to China. This is what we think, the market is growing, the local demand is growing, local customers are growing and becoming more sophisticated but we are still lagging behind the European or the North American or the Chinese situation. So the room for improvement is quite large.

And Giulio, if I may, just a couple of follow-ups. First off, in terms of quality of the Indian market for nylon-6, because you always mentioned that, for instance, the Japanese market is very demanding, is very sophisticated. What is on the contrary situation of the Indian market? And the second, I was reading a few reports on the outlook for nylon-6 the on in India. And it seems there is a kind of consensus that the expected growth for the market is between 4.5% and 5% per annum, which is compared to 3.5% of the global demand. So do you share this view that the India market is expected to grow significantly more than the global demand?

Well, as you can easily understand and I have just tried also to share with you the present local demand is not demanding for very sophisticated products. Clearly, going to Japan or going to India, we are speaking of 2 different worlds. But on the other side, the Indian market is developing fast, and also Indian customers are starting to demanding, for example, also ECONYL products, for rugs, but also for automotive and other applications. We have just heard that today of the new investment of Suzuki to create a new platform for producing electric batteries and EV vehicles in India. TATA has announced the same. Mahindra has announced exactly the same. So the market is changing quite rapidly. And this is absolutely confirming your, let's say, research about the potential higher growth of the Indian market with the rest of the world. Easy to understand. The GDP is growing fast. The government is finally building interesting infrastructure. And the Indian society is growing rapidly, also thanks to the incredible development of the digital market over there and, let's say, the capabilities of the new generations. If you go to India, you have no labor shortages, whatever, in the rest of the world is 1 of the biggest issue. Maybe in certain countries, labor shortage is a much bigger issue than raw material prices, if energy is not a problem.

The next question is from Andrea Bonfa, Banca Akros.

Most of my questions have been answered. My last one would be can the call with us, what is your ForEx balance of payment in U.S. or in other word, is the stronger U.S. dollar supporting you only at EBIT level or you got also some import with the euro cost?

I would say that presently strong U.S. dollar is helping us more than creating problems. Where we are having problems is, for example, in the nomination of cargoes that we are shipping all over the world because normally, cargoes are nominated in U.S. dollar prices and not in euro prices. But of course, despite the present difficulties of the European cost we can still export some material to U.S. having some positive contribution margin because of the gain of the exchange rate between U.S. and Europe. Of course, we are also buying some raw materials, especially some waste. But I would say that presently, the net effect, it is more positive than negative. Quantitative, difficult to tell you, also because the situation is developing quite rapidly. So we need now a bit to take some time to make some calculation. As traditionally, we are doing, we are always very careful to diversify our currency portfolio, and we try to produce where we sell. So to have a the lowest possible exposure to potential currency problems.

[Operator Instructions] The next question is from Lorenzo Borroni of a Tra Partners. [Operator Instructions] Gentlemen, there are no more questions registered at this time.

Well, if there are no more questions, let me thank you for attending our web call for the first 6 months of 2022 results, and I wish you a great evening and the rest of the week. Thank you very much.

Thank you to all.

Ladies and gentlemen, thank you for joining the conference which is now over. You may disconnect your devices. Thank you.