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 Full Year 2022 Results Webcast. [Operator Instructions] Now I would like to turn the conference over to Karim Tonelli, Investor Relator. Please go ahead, sir.

Thank you, operator. Good evening to all, and thank you to join us for Aquafil web call on year 2022. Before going ahead, let me remind you that this presentation may contain certain statements that are made to report our financial results, not other historical information. Any forward-looking statements are based on Aquafil current expectation about 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. Say that, allow me to leave the floor to Mr. Giulio Bonazzi for his remarks.

Thank you, Karim, and good evening, and thank you again for attending our video conference. In 2022, we achieved record results. We reaped the rewards for the work done over a long period that confirmed Aquafil's resilience and leadership even in a complex context. As always, I'd like to recall that I have the honor of leading a great group of people, and it is above all to them that we owe today's results. Aquafil's strategic decisions made many years ago proved to be crucial. Geographical diversification made possible to size important market opportunities in some regions, mitigating possible less favorable performances in other geographical areas. Research and development investments expanded the range of sustainable products, allowing Aquafil to become a benchmark for the market and the solution that everyone would like to replicate. Containment of cost trends in recent years, along with careful management of selling prices, drove a significant recovery of our business margins. Overall, we expect that 2023 will continue to be characterized by significant volatility due to the constant and persistent synergy in the market scenario. We will continue to pursue the strategic decisions that have guided us until now, investing in research and development in all areas and businesses. This will allow us to carry on and improve the project to make Aquafil an industrial group based on an excellent environmental, social and governance sustainability model. It will also be crucial to maintain our policy of constantly managing cost and product mix, ECONYL especially, in which we are ready to invest what is needed to keep our products not only excellent but also highly competitive. I'd like to conclude by emphasizing that we look forward for the next 3 years with optimism, expecting growth in all our businesses and at a global level. Thank you.

[Operator Instructions] The first question is from Gianluca Pediconi of MOMentum.

Congratulations for the results and happy to reading the press release an even stronger focus on sustainability. Giulio, I have a couple of questions for you. And one is your final remarks, where you said, actually I'm reading, you emphasized that we look forward to the next 3 years with opportunities expecting growth in all our business at a global level. So I would appreciate if you could elaborate a little bit more maybe without giving number, but at least some color or what do you mean with this statement? And the second, taking from Slide #16, letter C, you mentioned the expansion of the portfolio production and sales activities. So if also here, we can have some better understanding. And the last, but not least, any update that you mentioned on India would be very much appreciated.

Well, thank you, Gianluca. The simple reason about the next 3 years, because at a Board level, we have just approved our business plan for the 2023, 2024 and 2025. We are discussing, but very likely, as soon as the new Board will be established and we will share this, let's say, business plan with the new Board, which I remember, will be elected during the shareholder meetings of the 27th of April, we will likely give more details to the market for the very first time. But basically, yes, we know that 2022 and 2023, well, not differently than the years before, are very special years, and we are just seeing right in these days how special they are or they might be. But let's say that our forecast with all the incredible work that our people have done and are doing, we express a lot of optimism because of a lot of technical solutions and innovations that will become part of our portfolio during the next couple of years. 16 C, expansion of portfolio, well, I will go to India because then I have to recover the 16 C, the expansion [indiscernible] group constant growth. Well, I remember that last year, we restarted our engineering plastic activity. And that, of course, to start an activity during a difficult year from an economical standpoint is never, let's say, the best possible thing that might happen to yourself and to your company. Let's say that, finally, we are seeing a strong pickup of this investment, and we expect that during the next months, in the next couple of years, not only to see that the investment will deliver the expected results. But also a lot of ECONYL projects that are now under development also for the engineering plastic business area. About India, as we, let's say, declared in the pillars of the press release, we have just finished our due diligence, which, let's say, has gone well. And now we will enter into the final phase of the negotiations with, hopefully, our future partner. We, of course, are still very motivated to go to India, despite the difficult market situation that the entire world is experiencing. Because we are very much confident that India will be the country of the future because of less problems in terms of personnel availability, whether skill or unskilled because of economical growth and because of a geographic location that is making India very strongly able to deliver to several different markets, let's say, in the neighborhood. So we are still very much focused on this expansion and acquisition.

So Giulio, would be correct to presume that as pricing is concerned, you are active with the, let's say, industrial and commercial and now you are answering the financial considerations?

We are entering in the final price negotiation with the counterpart. So everything has been done. And nothing, let's say, no red flags or particular problems that are creating any difficulty for us from, let's say, a legal or financial point of view. It's just a matter of trying to find a common point with our future partner. Remember, that will be more a joint venture than a wholly-owned foreign enterprise. So in China, we are controlling 100% of the equity of the company. In India, we will likely control 51% or so. So we will be the majority shareholder, but we will not control, let's say, 70%, 80% or 90% of the company shares.

Thank you very much for the information. And looking forward to the very first Capital Market Day, with some, let's say, midterm target, the lack of it, and I'm very, very happy about that.

Thank you, Gianluca.

The next question is from Dave Storms of Stonegate Capital.

Congrats on the really strong quarter. I just want to start. I know last quarter, there was some concerns around the energy environment in Europe. I know we had a bit of a warmer winter over there. How do you see that impacting you in the last quarter and also going forward?

Well, thank you, Dave. Actually, clearly, last year has been very complicated in terms of energy prices. As a matter of fact, also during the fourth quarter of 2021, we suffered a big energy price increase that, of course, influenced our financial results for the fourth quarter of 2021. Starting from the very last part of the fourth quarter of 2022, we are starting to see a decline in the energy prices, especially in the natural gas in Italy or for, let's say, the Italian operation. I want to remember to all that, clearly, Aquafil today is having a geographical presence globally. And of course, if the energy was a problem in Europe, it was not a problem in United States and in Asia, if not marginally, not for sure, substantially. So we are seeing now, finally, energy prices declining, not of all types of energy and not in all locations, but we are expecting some kind of, let's say, more favorable cost situation between European facilities and the rest of the world, where clearly, the energy prices gave or have given a different impact on the unit cost of U.S. and Asia.

That's very helpful. If I could just keeping at a macro level, the movement to the Asian market. Are you seeing any impact from China reopening? And how is that impacting the business as a whole?

Well, not really. I have been personally visiting China finally after 3 years and 2 months because my last visit to China was January 2020, and I was there a couple of weeks ago. We are not seeing actually an impact on our local Chinese sales. I remember that our Asian markets last year were pretty positive. And this is what we are still seeing. As a matter of fact, for us, most of the China domestic market is connected with the automotive industry, and especially on the high-end segments of the automotive industry or eventually on the EV vehicles. This is, I would say, pretty constant at least for the first part of the year. Clearly, as always, we have been impacted by the so-called Chinese New Year because, of course, for a couple of weeks' time, between the end of January and the middle of February, the entire country, I don't want to say stops, but let's say, strongly slows down its activities and consequently also our sales. So it is never the first quarter our best quarter in Asia.

That's great color. One more, if I could. Just going into 2023, you mentioned that you're expecting 2023 will continue to be characterized by significant volatility. Is there anything specifically that we should be keeping our eyes out for? Or is that just general uncertainty in the market?

Well, it's a general uncertainty in the market. In our forecast that we are still seeing, especially Europe, pretty soft, while we expect a kind of hold in U.S.A. and Asia or eventually a little growth, depending on the market. For example, we are still expanding, I would say, with good satisfaction into the Japanese market, and we will see this expansion going on during also 2024 and 2025. And United States for the time being is pretty constant and, I mean, strong if you look at the quantities and the results of our American subsidiary. So it's mostly related to the European market, this softness rather than to the rest of the world.

The next question is from Roberto Letizia of Equita.

Maybe if you can elaborate a little bit more on the trend on the debt. On the year-end, you reached EUR 248 million of debt, which is 2.7x debt EBITDA, which is an increase versus last year, and it has slightly increased in the fourth quarter. So maybe you can spend a few words on the trend on the working capital in the last part of the year. What do you expect on the evolution of the overall indebtedness through 2023?

For 2023, we expect a decrease of our leverage because, let's say, the net result between capital expenditures and cash flow, it should give us a very, I would say, a remarkable decrease of our net financial position. Remember that the result of EUR 248 million is due also to, let's say, specific actions that Aquafil made during 2022, like, for example, the buyback and of course, the dividend distribution, which will also take place during 2023. And then, of course, the evaluation of the inventory given by the much higher selling prices and raw material prices that we have to pay during the last exercise, during the last financial year and quarter especially. So during the first quarter, we will start seeing a decline of our inventory levels, especially in the raw materials. Last year, if you remember, there was a very big difficulty because of transportation and logistical prices and availability of containers. So the entire industry has built a larger inventory on raw materials and we as well. That is now, of course, returning to normality because containers availability and time to receive the raw materials have returned to the normal or even shorter level during this specific quarter. So we are expecting a decline of the net financial position, which is completely under control of our people.

[Operator Instructions] The next question is from Carlo Maritano of Intermonte.

Carlo, we can't hear you, if you're speaking.

Can you hear me now?

Yes, we can.

Okay. Sorry. So I have a couple of questions from my side. The first one is on CapEx. Are you planning to maintain around EUR 40 million of CapEx in the next year? Or to follow the increase in ECONYL that you expect to reach the 60% target in the next year so you expect to further accelerate on investment? And the second question is on the start of the year, if you could provide some color. Are you still seeing some trends in line with the fourth quarter? So -- and North America still strong and Europe weaker or there's any kind of difference from this side? And the final question is on the engineering plastic. I was wondering how it's proceeding, your entry in this market? And what's the timing to see some material results from this area?

You said two and they are three. Okay, I will try to answer all the three questions, starting from the CapEx. Well, of course, 2023, we will keep our capital expenditures under control. But if we wanted to realize our business plan, we will have to continue to make investments. Clearly, as you know, also included in our nonfinancial declaration, we declared a target to reach -- or to 10% to 60% of ECONYL sales for the end of 2025. And this, of course, will demand some investments, like, for example, going to Chile, establishing some infrastructure there and making some expansion of our plant in Ljubljana. We have also the continuation of the investments that we launched during 2022 that are going to be completed during 2023. And clearly, the possible acquisition of GPPL or, let's say, of the majority of GPPL. But we plan to stay more or less always in the same level of CapEx. Clearly, not having pressure from a quantity standpoint, we are not in the necessity of making large investments for expanding our capacity. About the first quarter, I would say that we are pretty in line with our budget forecast. Nothing more, nothing less seeing, let's say, the business outside of Europe, staying, let's say, strong or very positive for the time being and Europe softer as expected. Not softer, unfortunately, neither better nor softer. Clearly, this is the present view that we are having. But I mean, in line with our budget expectations. So for the time being, nothing new. We hope, of course, that the recent bank problems is not causing any further difficulty. But clearly, we have been experiencing leading on a daily basis since end of 2019. So at the end of the day, we will keep working as usual, I must say. Engineering plastic, as I said short ago, after a difficult start up last year because at the end of the day, we arrived with our capacity ready to start up during the summer, right when the market started to slow down considerably. Now we are about to work 2 shifts per day. And -- but we are selling more. And so we are now, let's say, completing our staff to work also the third shift. So we think that from the second quarter, May, we will be, let's say, reaching the level that our plan was forecasting when we launched this investment. So this is the present situation. I hope I didn't forget something.

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

So thank you very much to all who joined the call. And I think that with some of you, we will see next week during the conference in Milan.

See you the next week in Milan for those who are coming, and thank you all for joining our full year financial results of 2022, and have a nice evening.

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