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 Quarter 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Karim Tonelli, Investor Relator of Aquafil. Please go ahead, sir.

Thank you, operator, and good evening to all, and thank you to join us for the Aquafil Conference Call on First Quarter 2023 Results. Before going ahead, let me remind you that this presentation may 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 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, and good evening, and thank you again for attending our conference call. The first quarter has substantially confirmed our expectations for the first part of the financial year 2023 in terms of margins. These results were determined by different dynamics of the main geographical areas where the group is present as well as by the unit value of raw material stocks. Sales of regenerated ECONYL brand products continue to grow, reaching almost 47% of the group's fiber turnover. The startup of new engineering plastic production plant is now complete, and we have started to serve this new market, which we expect will provide an important element of growth and portfolio diversification in the coming years. The group continues its research and development activities with the aim of improving and expanding the product offering as well as their production in a more efficient manner. We confirm that the year 2023 will still be strongly characterized by uncertainty and high volatility, especially due to the performance of the end markets in European and Middle East and Africa, which allows for extremely limited visibility. In this complex and articulated scenario, attention to cost management remains high and focused on their maximum rationalization, and the group remains committed to the continued development of innovative and increasingly sustainable solutions to improve the competitiveness and quality of the products sold. Now we are ready for the Q&A session. [ Andrew ]?

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

I here asking some questions. The first one is on the current trading. If you could provide us any update on the trend you witnessed in April and in the first weeks of May? Is there any change in the trends compared to the first quarter? The second one is on China. Are you seeing any improvement from the reopening? Or it's too early to see any kind of improvement? And the third one is on India. Is there any update on the acquisition in India or you confirm what you said recently in March?

I'll start from the third question, which is, of course, the easiest. We are working on it. And we will see when it is the proper moment to finalize it, of course, if and when the negotiations with the local partner arrive to a point of satisfaction. Talking about the current trading, we confirm that, unfortunately, especially in the European market, we are seeing a slow demand. Of course, we have been through typical slow momentum driven by Easter in Italy also by the 25th of April, which is normally giving long shutdown of our customers in case of slow market demand as well as May in the Central European countries where there are several, let's say, festivities that are normally reflected in a slow period of the year. With regard to Asia Pacific and North America, the dynamics are different, especially the one of North American market, and they seem to continue on a good trend as they did last year, plus or minus. China. Well, let's remember that our Chinese plant is not serving only the Chinese market. On the contrary, the Chinese market is representing the minority of the goods sold from that plant. The plant is serving apart our, let's say, operations that we manage directly, like the one in Thailand or that we managed through a local partner like the one, Japan. We service mainly the market of Oceania, so Australia and New Zealand. With regard to the Chinese market, it's mostly coming from the automotive market, which seems to ramp up and where we are having a lot of new opportunities with regard to the EBITDA, of course that are very much strong in China.

The next question is from Gianluca Pediconi with MOMentum.

I have a couple of questions. I mean, the first one is about seasonality in profitability. In Q1, you reported an adjusted EBITDA margin, which was 12.9%, if I am not wrong. And compared to Q4, which was something this is in the range of 12%, there is an improvement. What [indiscernible] make them to look at the profitability trend quarter-by-quarter or because of the seasonality we should all look year-on-year, so first quarter '23 versus first quarter of '22. That is the first question. The second question is, a couple of months ago when you reported the full year results, in the press release, it was a pretty -- it was a statement that you were looking forward with extreme optimism. What I want to understand is if this lack of visibility, mostly in Europe is something which is materializing over the last couple of months. So compared to your view -- again you reported full year result, now there is a deterioration in the business.

Well, yes, I think that makes much more sense to look quarter-by-quarter -- financial year with financial year. So first quarter 2022 with first quarter 2023. Clearly, during the last 18 months we have gone through very special momentum that have driven very big changes in terms of evaluation of stock evaluation because of energy prices, because of raw material prices, and because of selling prices. So there will be, as we have already announced during our last conversation, let me say, kind of adjustment during 2023 as there was an adjustment in 2022, which in 2022 went upward because of all the cost and inflationary pressures. In 2023, on the contrary, given the return of the energy market to prices that are, let's say, more normal, it's not yet returned to the ones at pre-COVID, or, let's say, the situation of the years pre-COVID. The raw materials are also defending, driven by low crude oil prices and low energy prices, and also low transport costs that are putting pressure for commodities coming from other markets, which last year, it was almost impossible to receive. So there was a kind of natural protection by the European -- around the European market because of this, let's say, transport -- let's say, a situation that was really creating a big problem. So this is, of course -- these are, of course, factors that we will have to consider, especially during the first semester of this year until this adjustment will -- if not be completed entirely, but I mean they will have shown almost the biggest part, at least, of the effect. The optimism is still there, but when we gave that, let's say, opinion, it was more related on a medium, long-term basis. So we spoke about the approval by the Board of Directors of the 3-year plan. And I mean, this is clearly still valid. On the other side, there are -- there were already and we are confirming that especially during the second quarter, we are seeing especially in Europe, a slowdown of the market demand, which was expected by our budget forecast. Now we must understand how long and how big this, let's say, slowdown will be.

Giulio, I may ask, this slowdown in EU to -- which market and the market is restoring mostly -- it's mostly of transacting...

No. Automotive market, at least for the time being, is holding at, let's say, a relatively healthy level in our case, especially thanks to Italy. We are seeing a slowdown in all the other areas that can be polymers, especially the base polymer business, which is more a commodity. We are seeing a slowdown in the Nylon Textile Filament, the NTF as well as in the contract market for the BCF application. So it's more a general slowdown. Our assumption is that there is, of course, an effect of the higher interest rates, lack of trust and destocking activities that are going on by the customers, just like we are, let's say, implementing strongly during the first period of this year.

And very last clarification. And when you mentioned that profitability was affected by material stock energy price, I didn't touch it. You implicitly are meaning that the second half there will be initial comparison. I think that was what was your message...

There I was saying that, last year we have gone through a round of price increases of all the cost factors that have brought big influence on our stock evaluation. This is because of, let's say, how you have to account your numbers. Clearly, if you buy raw material cheaper, if you buy energy cheaper, and you readjust your prices according to the lower cost factor, you have also to implement an adjustment of your stock evaluation, which is, in reality, not impacting the real, let's say, profitability of the company. Last year, if you remember, we also said maybe we should look at 2022 and 2023 altogether because of this, let's say, unprecedented variations. And this is exactly what we are experiencing these days.

The next question is from David Storms with Stonegate Capital Partners.

Hello, everyone. Just wondering if we could start with your current debt levels. They've kind of held steady around that, call it, 2.7x. Is there any interest in paying that down? And how do you see your capital allocation priorities [Technical Difficulty]?

Well, the -- sorry, at the closure, the voice was not coming clear. Are you speaking about the ratio between EBITDA and net financial position?

Yes, correct.

Yes, it's holding at that level. If you look at 2022 first quarter net financial position, if you go back 1 year, you see that it went up, let's say, in an important manner. This year, it stayed more or less stable because we are working, as we announced last year on containment of our net financial position. Now, of course, reducing our stock level, which is also partly impacting our profitability because clearly, if you produce less and you sell more, the marginality and the unit cost factor are touched by this fact. But I mean, this is quite normal and you have to do it very fast, especially when the movements are so important as we are experiencing now. You cannot wait too long, there is nothing to impact your marginality even more.

Very helpful. One more, if I could. You saw strong volume growth in the Americas. How much runway do you see left in that geographic segment?

That's a good question. Clearly, as you remember, for sure, we took profit of the exit of INVISTA as a fiber supplier. So now in the United States, there aren't many -- more or less, I mean, in terms of carpet yarn producers -- independent because, of course, there are integrated carpet yarn manufacturers that are playing a different ballgame. So in terms of independent fiber manufacturer, you have Aquafil, you have a universal fiber system, and you have still a little bit of [indiscernible], which is still having a small production, let's say, not very up-to-date equipment and operations. So we imagine that during the next couple of years, there could be some other adjustments. But I mean, clearly, the room is narrowing. So we will have to work hard in terms of product innovation, circularity and introducing maybe also some, let's say, applications that are close to the ones that we are, let's say, working now, like, for example, transportation, not only automotive, but I mean, cruise, airplanes, trains, so there are a lot of, let's say, still possibilities that you can go to touch niches that are not yet served by us.

[Operator Instructions] The next question is a follow-up by Gianluca Pediconi with MOMentum.

Giulio, a quick follow-up question. ECONYL in Q1 was open with -- growing the product up 11%. And in terms of price mix, you both increased the price and the mix year-on-year, market profitability was affected. Thus the reason is mostly due to the negative operating leverage also played a role the way you calculated the cost of raw materials because already...

No. If you look at the difference between our, let's say, forecast and the actual results, there are a couple of factors that we have to take into account. One that we didn't disclose that we should have maybe normalized because it is a bit -- let's say, we have to explain. We have got an accident by one of our operation in the United States that was due by a homeless that entered into an electrical cabin and light up the fire, okay? This caused -- and it was in our carpet recycling facility in Phoenix, a reduced operation for the entire quarter, okay? We didn't -- because in terms of prudence, we didn't account or register any, let's say, special -- any special compensation because we are waiting for the final count by our insurance company. This is something that, I mean, if you look at cost amount could be more than $1 million during the quarter. The second factor is how much you buy in terms of raw material and the kind of raw material that you are using on stock. So if you are using raw materials and stock that are being purchased at a higher price, and you buy, I don't know, 50% of -- I'm giving numbers just to explain the problem. You sell 4,000 tonnes and you buy 2,000 tonnes, and the 4,000 tonnes are made 2,000 tonnes with fresh raw material and 2,000 tonnes with old raw material. Clearly, your costs are based on 2,000 tonnes of old raw material, but the final evaluation of your stock is coming from the new fresh raw material, if I explain myself correctly. And this is impacting in terms of practical devaluation of stock, but it is not a loss of margin in terms of -- we reduced prices more than raw material. This is not what is happening. It may be happening not in a large scale that is happening exactly the [ content replaced in ] the opposite effect.

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

So thank you very much to all for joining this conference call, and see you at the next.

Thank you. Good evening.

Good evening to all.

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