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 Group's Third Quarter 2022 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 for joining us for the Aquafil conference call on our first 9 months results. Before going ahead, let me remind you that this presentation might contain certain statements that are made to report our 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 results to differ from those expressed by the statement. For a discussion of these risks and uncertainties, you should review the disclaimer in the presentation we issued today. With that allow me to leave the floor to Mr. Giulio Bonazzi for his remarks.

Thank you, Karim. Good evening to all, and thank you again for attending our conference call. Our company's overall excellent performance continues despite an extremely complex and volatile global framework. In the first 9 months of 2022, we increased the EBITDA by 23% over 2021. And the same data for the third quarter is also better than that of the previous year by 7%. This result was made possible both by Group's presence in different geographies, which enable it to size the important growth opportunities and by careful day-to-day management of cost dynamics and cost recovery. The United States experienced really important growth in the carpet fibers product line. And also in Asia and Oceania, the market was solid, thanks to demand from the residential sector in the Japanese market. In EMEA, there was the expected slowdown in demand that we see stabilizing these days. Careful management of margins allowed the almost full recovery of the quarter's very high energy and raw material cost levels. For the fourth quarter, we see a trend for the U.S. and Asia absolutely overlapping with that of the first 3 quarters. In EMEA, the decline in demand is stabilizing and in addition, the high price increases seen in the first 9 months seem to be slowing down, allowing to maintain the unitary margins. We, therefore, expect the result for the fourth quarter to be better than the fourth quarter of 2021 and as usual, lower than in the previous quarters. This result on an annual basis will be the highest absolute profitability levels ever achieved by Aquafil Group. Thank you and waiting for your questions.

Thank you. This is the Chorus Call conference operator. We will now begin the question and answer session. [Operator Instructions] The first question is from Roberto Letizia with Equita.

So first of all, that is one, sorry, it is not the most important one. But actually, I see the tax rate being very low as well as the interest charges. Can you elaborate a little bit on that? And specifically on the tax rate, if you can give us a trend of what is the overall level respective of the full year considering the special low level of tax registered? You have positive slightly lower overall profitability in the quarter -- in the third quarter. So the EBITDA margin is decrease versus the other quarter. I was wondering what are the main drivers that set up the lower profitability specifically in the quarter, I'm wondering if there is anything related to the new client in U.S., which are probably [indiscernible] from Europe that is still impacting the short term that may be solved in the coming months? Can you elaborate a little bit more on the trend for Europe, which is the most problematic area? You announced [indiscernible] chemical use similar to [indiscernible] what's the drivers and the plan behind Europe in these days and the coming weeks? And the last one, just a very quick clarification, by assuming the fourth quarter to be higher than the fourth quarter of '21, that would imply an EBITDA of about EUR 85 million. Is that correct [indiscernible] in EBITDA? Is that a correct reference?

Thank you, Roberto. I will take your first question. Regarding the tax rate of the fourth quarter, we have to consider that in our profit and loss, there is no tax income that's deriving from certain costs. And so this gives an extraordinary result regarding the tax rate. The tax rate for the group will remain the same that we had in 2021, so around 20%, 21%, except for this quarter. Regarding for the financial costs, we have the effect of the market-to-market of the interest rate hedging that grant to Aquafil revenue on this kind of cost for this quarter and that is to be considered as an extraordinary event for this quarter and will be normal during 2023. For the other question, I will leave the floor to Giulio in order to reply to the other question you made.

Thank you, Karim. Well, traditionally, the third quarter because of the summer period is always lower than the first 2 ones. And also on top of that, we announced during the previous conference call that we were expecting a slowdown of the European market, which actually took place. Now this slowdown seems to be stabilizing. So we are not going further down, not yet seeing a strong recovery. But let's say, we are staying at a level which is flat in comparison with the sales of the third quarter. Announcing the fourth quarter results will be better than the one of last year. Of course, we expect a very high result for the 2022 overall numbers. As you know, we never comment nor give any let's say, guidance in terms of absolute values of the final EBITDA. So we leave to you to elaborate and to decide whether we will get to the level you spoke of 85-plus or lower than that.

Just a clarification on that. Actually, I was hoping you probably understand in the statement of the fourth quarter only the share of revenues or [ in little details ] also to EBITDA? So that...

[indiscernible] to EBITDA.

The next question is from Niccolò Storer with Kepler.

Two actually. Maybe the first one, again, on the trend in EMEA. So if you can comment a little bit about the minus 28% volumes in Q3, maybe giving us some details on BCF, NTF and polymers and the different trends between the 3 products? And also looking into Q4, you said that you are seeing a stabilization. So I assume another minus 30% in volume. And also here, if you can spend a word on which are the products which are doing better, which are the products which are doing worse and maybe the feeling you're getting from your clients on demand evolution into beginning of 2023? The second one is on India. Maybe if you can give us an update on the potential acquisition in India you announced in the late August?

Thank you, Niccolò. If you remember, we made a comment this summer that was, let's say, end of August, when the energy prices were skyrocketing, and clearly, if energy prices in Europe have remained at the level of August than we would have seen a much more difficult picture. The scenario would have been much worse than the one that we are seeing today. And now lately, we are seeing on the contrary, energy prices that are returning more or less to the level of the second quarter that are exceptionally high but not stupidly crazy as we experienced during July and especially during August and September. So what we are seeing is a market that seems to be a little calmer, okay? So not going further down, staying at a low level, which is similar to the one of the third quarter. But not at the end of the day so much different than the fourth quarter, at least for the fiber part of 2020 and 2021. So nothing, let's say, crazily down. The result of the lower volumes is mainly driven by the polymer business. The polymer business that was exceptionally strong during 2021 and that now is, how can I say, kind of more normal, if not lower because, of course, automotive is not performing super well, residential business with all the white appliances and, let's say, home appliances are not doing very well after, let's say, 2020 and 2021, when let's say, people really refurbished their homes. But also this part seems now to be getting a little better after a difficult second and the third quarter. Beginning of 2023 is now difficult to comment. We are not expecting, of course, a strong beginning. So we will have to be a little careful, especially in Europe, while we are not seeing major changes in U.S. and Asia and Oceania. So overall, we hope to be not much different than in 2022 with regard to volumes. But I mean, of course, everything will be seen during the coming weeks. India, well, we are in the due diligence process as we have shared with you guys, when was it, a couple of months ago. The due diligence is moving forward according to the Indian timing. I remember for those who are expert of that country that we have just finished the Diwali season -- the Diwali festival season, which is kind of Christmas and summer and Easter together of here in Europe. And this has caused, of course, a slowdown of the due diligence operations. Now our people this week and the next weeks will be visiting India, let's say, continuing the work. So nothing more or nothing else than that. Of course, we are highly interested in entering into the Indian market. We think that India can be the next China in terms of growth and result possibilities, but it is never easy to carry on with this kind of acquisitions.

The next question is from Dave Storms with Stonegate.

Can you just touch on your general debt to EBITDA leverage levels? And how comfortable you are with the levels where they're at?

I'm sorry, Dave, your voice is not very clear. Can you please repeat?

Yes. Sorry about that. Is this better?

Yes, please. It is better.

Perfect. Just your general leverage levels and how comfortable you are with your debt to EBITDA, where it's at and how you see that changing going forward?

I'll try to repeat to make sure that I understood. You are asking us to comment about the EBITDA development for the future? And?

And your net debt levels.

And the net debt level. Well, the net debt level is now the result, of course, of the higher unit prices and unit cost. And an increase in the raw material inventory that we decided to execute in order to make sure to have the raw materials and also because we could take some opportunities of, let's say, convenient purchasing prices for certain raw materials that were present during the summer period. So we think we will absorb these higher inventory in terms of raw materials during the fourth and the first quarter of 2023 as well as we are working to keep the level of the finished goods in terms of volumes at the level of today, which is a very low and comfortable one. We are very careful not to build any inventory during these days because of the high unit cost. So to book something on stock at high prices, it's a risk in case, of course, the market slows down and energy and raw materials follow. With regard to the EBITDA for the future, of course, we are working to make something which is better and better. But as I said, to Roberto Letizia, we don't comment for, let's say, we don't give any, let's say, future prospects. Clearly, we're trying to work hard to keep this trend of improvement that we have shown from 2019 and 2020 and 2021 and 2022 as well.

That's very helpful. One more, if I could. Just with regards to supply chains, are you seeing some of those challenges ease up as we go into the back half of the year, rest of the year here?

Well, not really, but this is because of the peculiar infrastructure that Aquafil has built over the years. So we are able, thanks to our global, let's say, positioning to purchase and sell, but not only to sell, but also to purchase raw materials from all over the places. Recently, also, we are seeing a decrease in terms of containers cost shipping, especially from Asia to Europe and United States, which is helping us to take some profit from eventually purchasing raw materials from those areas. And this, of course, is helping us not only to have enough raw materials, but also to grant our customers with the best possible available prices.

The next question is from Gianluca Pediconi with MOMentum.

So Giulio or Karim, a couple of questions. The first one is on ECONYL brand. What is behind the 64.5% increase in Q2? It's a new customer, new application, the same customers buying more, it's pushing or pulling demand? So this is the very first question. The second one, I know, Giulio that you are not comfortable providing guidance, but bear in mind what you said about profitability and the net working capital, am I right to expect the net debt-to-EBITDA in December below 2.5x?

I'll start from the last. Of course, 2.5x is our target, but with the present high to normal and sales and the present high raw materials will be very challenging. But it we will not be different from this number. So we will be, let's say, still at a very good level considering that also during 2023, our capital expenditures will stay in the range of EUR 40 million, which is our, let's say, targeted level. About ECONYL, what can I say? We are continuously gaining market share, and we are having more and more applications that are demanding ECONYL both in carpet and in textile for the apparel sector. Also some new customers, but also old customers that are continuing to transitioning from petrochemical fibers like Nylon coming from oil to, let's say, ECONYL fiber that is coming from waste recycling. Of course, as you know, the more ECONYL raw material availability we have the more we grow our sales. The easiest part for ECONYL is to grow sales. The most difficult and most challenging one is to procure waste and to create the right technologies to process this waste into, say, first-grade monomer, polymers and fibers.

The next question is a follow up from Roberto Letizia with Equita.

I have one more question, looking in the drivers that will affect your business in 2023. I was wondering if -- for what regards the U.S. market, basically, you are not expressing full profitability now because the additional shares you are getting from INVISTA are not yet served in local-for-local. And I am wondering if this will partly be a driver for 2023? In the sense that those sort of clients in [indiscernible] are higher profitable next year because you will start at the shipping point and maybe you can describe it further. You can serve those customers local-for-local with higher profitability. Am I correct in looking at this driver for next year?

Thank you, Roberto, for this assist. Yes, you are. In reality, as traditionally we always do, Europe is supporting growth elsewhere in the world for Aquafil's growth which, of course, during 2022 is not the ideal solution because of high energy prices because of high transport cost. Clearly, this is made even at lower margins than normal. So we are working hard to try and get to, let's say, increased capacity in U.S. I would say we are slightly later than expected because of delays by our suppliers in terms of microprocessors and other components that are necessary for building the lines there. It's not a big investment. As a matter of fact, we're speaking about a few million dollars of EUR today. It is about the same, okay? But clearly, this trend should get better during, let's say, the second part of 2023 because we are now still shipping fibers from Europe to U.S. We're still shipping fibers from Europe to Asia, okay? So the trend and the desire of the group is trying to build the capacity local-for-local which is better tremendously today in terms of unit cost. It is better in terms of working capital and time to market. So the service to the customers will also be better than the one of today.

The next question is a follow up from Gianluca Pediconi with MOMentum.

In a follow-up, this question, have you any kind of internal calculation back on the envelope number of how much is anomalies, abnormal costs that you experienced in Europe impacted your P&L? So without -- if it were normal time as for right energy cost, price cost, so on and so forth, what would have been the impact of this drop down by back of...

Making fiber and polymers is a highly intensive energy industry. This is even more true when you consider that today, we are not only making polymers and fiber, but we are also making monomers through nylon depolymerization and waste recycling. So clearly, for us, energy prices are essential for keeping our competitivity level. Of course, we have an infrastructure system, which is partially based in Italy, partially based between Slovenia and Croatia. And this is, let's say, the bulk majority for our European infrastructure. Then of course, we have U.S. for U.S. and China for Asia Pacific market. The dynamics in terms of energy prices has been tremendously different, of course, continent by continent, but also country by country and let's say, depending by the energy mix that you are using for sometimes you buy natural gas, sometimes you buy electricity or more or less. Sometimes you buy steam, okay? And the dynamics are, let's say, different depending from country to country. So we would have really loved not to have COVID, not to have the war and not to have to be confronted with these problems. We would have very likely being better than today, okay? So if and when the situation stabilizes, I believe that we have possibilities of continuing our growth in terms of margins and sales.

Actually, let me rephrase the question. Did '22 results that you expect to break any record in terms of EBITDA, I mean how much for price that you are able to reach this side and against all odds? Or you are very confident in the beginning of the year -- well, let's say, after the war?

If I can comment because you know that we never give details. But look, let me say this, Aquafil has always been extremely good in managing exceptional situations historically, because of the infrastructure that we have built, because we have built a global positioning that is helping to average eventual up and down continent by continent, but supplying this global positioning, as Roberto said, local-for-local. So we are not concentrated in one area and exporting, okay? Also because our products are difficult to export in a large volume quantity, okay? You have, of course, transport cost, import duties, working capital, time to market that are really making this very, very difficult. This is also helping us because, of course, we don't see competitors coming from, I don't know, Asia, invading and flooding the market, for example, with DCF yarn because, of course, DCF is a product that is difficult to transport for long distances, keeping high competitiveness. Of course, the present exceptional situation of the European market with this crazily high energy prices are making our life a little bit more complicated, and we have to manage our day-by-day business considering this. So we have been controlling since last spring our purchasing of raw materials, trying to have a mix of suppliers that is giving us the best result. We have managed our production optimizing the energy cost. I remember that Aquafil in Italy is working with an internal energy production through gas-fired turbine system, which, as you can understand, was not the best solution for 2022. But nevertheless, we have been able to manage this reaching this very good financial results.

So just to conclude for you, a record profitability year in the worst era, therefore energy is normal?

We don't want to say that -- I don't want to say that it's normal, but maybe we are showing now what would have been the results without -- let me remember the mistakes we made in 2019 or without COVID effects in 2020 and partially COVID and high energy prices of the fourth quarter in 2021. So this is the reality. So I believe that Aquafil has a potential in terms of sales and margins that is very good. And I'm not [ letting ] shares, by the way.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.

Yes, I want to thank all the people for joining our conference call and see you next time with the results of the full year 2022. Enjoy the rest of the day and your evening. Bye.

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