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 2023 Results Web Call. [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 video conference on the First Half '23 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 expectation about the future events and are subject to recent uncertainties that could cause results to differ from those expressed by the statements. For a discussion of these risks and uncertainties, you should review the disclaimer in the presentation we issued today. Saying that, allow me to leave the floor to Mr. Giulio Bonazzi for his remarks.

Thank you, Karim, and good evening to all, and thank you again for attending our video conference. The first half of the year was marked by extreme volatility. As already announced in the first quarter and at the beginning of August, the context of reference was more challenging than expected. In EMEA there was a considerable slowdown of the end market, with a consequent impact on the group's volumes sold. Moreover, the high unit value of inventories stocked in the previous year, coupled with a strong reduction in raw material prices, led to a temporary yet significant decline in margins. In the United States and Asia Pacific, demand generated satisfactory results, confirming the previous year's levels despite a slight decrease in the U.S. textile fiber sector. The engineering plastic project progressed well and is expected to reach the targets set by the end of the year with excellent growth potential for the future. Important results were also achieved by regenerated ECONYL branded products. Volumes sold remained essentially in line with the first half of 2022, confirming the strong resilience. The debt-cutting measures continue to be an important objective that the group keeps pursuing through actions aimed at rationalizing working capital and investments, thanks to the conclusions of the cycle launched in prior years. With regard to the second half of the year, Asia and the United States are expected to confirm a substantially stable market demand. In EMEA the market of fibers for garments remains slow, with an expected recovery of volumes sold for fiber for carpet and polymers. Now...

Now we are open to receive your eventual questions.

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

Thanks for taking my 2 questions. The first one is on the trend you discussed related to Europe and the European weakness. Can you give us an idea of possible differences between sell-in and your clients sell-out, because it seems that your figures are much worse than what we see in the end -- on end markets, both on BCF and also on garment threads? And then maybe if you can elaborate on whether the difficulties you are facing is something broad-based, or do you think you have some company-specific issues which make things worse for Aquafil compared to broader competition? The second one is on the measure, you talked about debt cutting measures, and referring to CapEx. What should we expect for 2023? And considering that you already spent EUR 18 million in the first part of the year, if you multiply this by 2, we end up very close to 2021 and 2022 levels. So I was wondering here if we can have some room to optimize these expenditures?

I will start from the second question. No, you should not multiply by 2 the first half of the year, because in the first 6 months we have got some [ queues ] from the past financial year that we have to complete during the first semester. But also please consider that inside the EUR 18 million that you have, let's say, mentioning, there are also IFRS 16 contributions that, of course, whenever you renovate, for example, a rental contract for building, you have to, let's say, write the entire amount that you have to pay during the timing of the contract. With regard to EU weakness, sell-in, sell-out, and market or company. Well, we believe that we have not performed worse than the market [Technical Difficulty] example, on garment on the sell-out of, let's say, the retailer part of the industry, this is not the part that we normally confront ourselves. And on top of that, normally, the more you go upstream, the more there is a trend of reduction of inventories that is creating a temporary demand which is lower or, let's say, much lower in this case than the actual market demand. So according to our, let's say, elaboration, we don't see a worsening of our market share. But eventually, even an increase, for example, in automotive sector, we are quite sure that we are still, let's say, gaining market share and not losing momentum.

The next question is from Dave Storms of Stonegate Capital Markets.

Just 2 quick questions from me. One around time line of margin recovery, it looks like it's mostly just a mismatch, like you mentioned, between previously higher expenses and lower material prices. Any sense of when that could normalize? And then additionally, the ECONYL revenue is still showing really strong as a percentage of your total revenue. Is there a thought on what the runway for that is? Is there a goal to get that to a certain percentage of your total revenue? Any guidance you can give us there would be very helpful.

Well, the ECONYL percentage is in line with our expectation. So we are not caught by surprise by the resilience of the ECONYL products. This is normally, let's say, giving us good results. With regard to the margins, when it should stabilize, we believe that 2023 was -- continued to be affected also by the mechanics of, let's say, writing the balance sheet that is taking into account the average purchasing price, not the punctual purchasing price of the month or of the quarter. So clearly, 2023 will be an exceptional year because last year, 2022, was equally exceptional on the other side. And last year, we experienced a tremendous growth in raw material prices that has created a higher valuation of our inventory. And this year, we have seen an equally tremendous decrease in raw material prices that actually we were figuring out to be much lower than it happened during the first semester. We are seeing now a stabilization in these raw material prices, even the beginning of slight growth, but we believe that this will not have a major effect on our inventory valuation for 2023. Maybe in 2024 and 2025 we will see different numbers. But I mean, 2023 is practically digesting the hangover of last year.

[Operator Instructions] The next question is a follow-up from Niccolò Storer of Kepler.

On volumes, putting together all the indications you provided on the second part of the year, do you think that the minus 11% which we are seeing in H1 could slightly improve, could remain at similar levels? I mean, from the wording, it seems we should not expect a worsening at least. Is this correct?

Hopefully, this is what we are expecting. I mean we have seen already -- we have been assisting during the summer already to some kind of bounce back of certain, let's say, end markets, like the carpet yarn market and the polymer market. Still, the nylon textile filament is slow, but I believe also because it had a different seasonality. I mean, carpet and polymers are much more reacting to the momentum to the month or to the quarter, while the fashion and garment industry are more, let's say, reacting to the season. And secondly, the destocking in carpet and polymer started earlier. So we have seen a decrease of demand of polymer already starting from last year, if you go and see the numbers of 2021 with 2022 -- and we believe that 2023 will be substantially in line with the 2022 -- while the carpet yarn market experienced a big drop during April and May and started to bounce back already in June and even, let's say, giving better feelings during July and August. Clearly, this is an evident sign that the inventory has been reabsorbed, so now we should be in direct gear with the demand of the final market. So we hope that the demand will keep a certain resiliency. And at this point, we should keep the present running rate, which is not, let's say, lower than the one of last year, maybe even slightly better in Europe [indiscernible] of course.

Okay. And maybe on carpets, so BCF, can you give us a sense on which is the mix that you're seeing in the current, say, summer's bounce back?

Yes, the current trading of our BCF carpet demand, yarn carpet demand, is more related to automotive. I mean, also you have read during these days that the official numbers about sales of cars in Europe is giving a positive trend. And also in residential is holding. It's not improving, but not decreasing. While the commercial market, so the one related especially the office business, has seen a drop in demand. We will see what is the result of the rest of the year. But prudently, we are still considering that this part will remain, let's say, slower than last year and the second part of 2021.

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

Okay. So thank you very much staying with us during this call, and see you for the next one that will be in November. Thank you.

Thank you. Thank you very much.

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