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

Good afternoon. This is the Chorus Call conference of operator. Welcome, and thank you for joining the Aquafil Group's Third Quarter 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Karim Tonelli, Investor Relator of Aquafil. Please go ahead, sir.

Thank you, operator. Good evening to all, and thank you to join us for the Aquafil video conference on our first 9 months results. Before going ahead, let me remind you that this presentation my contain certain statements that are neither reported financial results nor other historical information. Any forward-looking statements are based on Aquafil's future 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 the risks and uncertainties, you should review the disclaimer in the presentation we issued today. With that, allow me to turn the floor to Mr. Giulio Bonazzi for his remarks.

Thank you, Karim. Good evening, and thank you again for attending our traditional video conference. The third quarter confirmed the trends that have already emerged from the comment of our first semester results of 2023. In EMEA, September witnessed a reversal of the previous month trend with positive signs in terms of demand for both textile flooring fibers and polymers. In fact, they were back in line with the performance reported in the same period of the previous year. By contrast, the weakness of the fibers or garment product line continues. In the United States and Asia Pacific, the reference market remained substantially stable in the first 9 months. Volumes sold of regenerated Econyl branded products in the first 9 months of 2023 proved once again it to be resilient, exceeding the previous year's level. The engineering plastic project continued to grow, confirming the achievement of the preset target by year-end, with excellent development opportunities for the future. The temporary effect of margin reduction already witnessed in the second quarter due to the high unit value of inventories stocked in the previous year continued. Considering the temporary effect, the company started the procedure to request certain institutions to temporarily suspend the covenant verification. The actions to contain the net financial position and to enhance industrial efficiencies still represent a strategic priority for the company, which remains strongly committed in their implementation. The recent launch of the process to discontinue Aquafil U.K.'s operations, combined with initiatives to rationalize the group's operations will lead to significant savings. The Q4 performance is projected to be in line with the one of September. Accordingly, in EMEA, demand for textile flooring fibers and polymer is expected to be higher than or in line with the same period of the previous year. The product line of fibers for garment is forecasted to remain weak as it was for the first 9 months of the year. Volumes sold in the United States and Asia Pacific are expected to be in line with those reported in the fourth quarter of 2022. We also remind you that on November 21st, we will be pleased to present our outlook for the next 2-year period. We invite you all to attend this important event to share with you our idea of the future. We are now open to your questions.

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

I have 3 questions. The first one is related to the U.S. So in the third quarter, you noted quite important decline also in terms of volumes compared to the previous quarter. I was wondering if you could provide us more color on this performance? The second question is related to the strike of carmakers in the U.S., if you expect any impact in the fourth quarter from these strikes? And finally, the third question is related to EBITDA. So in the presentation of the first half, you said that around EUR 13 million was related to the impact of a higher unitary cost of raw materials. I was wondering how much is in the 9 months instead? What's the additional impact in the third quarter?

Thanks, Carlos. Well, in reality, in U.S., the third quarter of this year is substantially in line with our expectations. And if we confronted with the third quarter of last year that was super record ever, there is through a decline, which is due partially to a market which is, of course, less demanding, even though for what we are seeing recovery, but also already considering the possible effect of the strike of the workers, trade unions for automotive because through that, this strike started during September and partially ended in October but the industry started already to prepare for the strike during August. Now we have been very slightly impacted because luckily, few of our models or better, the models were [indiscernible] is nominated were hit by the strike, and this helped to contain the situation of the American demand. With regard to the fourth quarter, we are not expecting a further impact of the strike because the strike is apparently going to an end. With regard to the EBITDA of the first 9 months, the amount of the unit price of the raw material is around slightly below EUR 20 million.

The next question is from Dave Storms of Stonegate.

I just have 3 questions as well. When it comes to the higher unit cost inventories, do you have a sense of how long it will take that to normalize? With regards to this [indiscernible], you expect to see from the U.K., do you have a plan on reallocating those funds? And just around the covenant verification suspension, can you give us a little more insight into what the logistics are and how you expect that to play out?

How long? We are still impacted also during the fourth quarter. We will give you more color during the meeting of the 21st of November. We are not expecting major or, let's say, if not a normal impact from next year. So 99% of the impact of the higher that it should be completely absolute during 2023. And it's a temporary, let's say, effect. And that's why we are asking for a covenant holiday to our institutions that should be lasting from 31st of December and the first semester of 2024. So we should not have any request for the year 2024. But again, we will give you more color during the 21st of November meeting. The saving plan. Yes, of course, the U.K. saving is, of course, important, but you have to know that immediately, since the crisis started, Aquafil operated in order to keep operational cost at the right level. Presently, we have already achieved in U.K., we are speaking about 30 headcount. But altogether, we have already achieved in the group a reduction of personnel of around 100-person. And we count to arrive between 120 to 125 before the year-end with also some reduction during 2024. So the reduction of personnel continues and is not only related to Aquafil U.K., but also to our Slovenia, Croatia operation, mainly because, of course, as we said, Asia Pacific and U.S. are okay, and also European BCF, which is partially in Slovenia and partially in our Italian operation has returned, let's say, to healthy levels already during the month of September.

The next question is from Nicolas Storer of Kepler.

3 as well. The first one is on EBITDA, the 9 months. If you -- if we consider the EUR 20 million impact from inventories, we would move from EUR 37 million to EUR 57 million, and we would still be some EUR 16 million below previous year. So can you tell us the reason of the EUR 16 million decline and maybe a split between the volume effect or maybe the mix effect or other things that might be in the numbers? The second question is on your net financial position bridge on Slide 10. If you can comment on other cash cost item minus EUR 20.1 million, what is this -- what is this item including here? And the last one, again, on covenant extension. Do you already have in mind how much this is going to cost you?

Hopefully, nothing. I answered you for the third question. Let's say that we have already received the first acceptances without any request of, let's say, penalties or touching the impact rates. We will see when we believe this operation. Of course, it's a relatively short holiday period, the one that we are asking and due to a very special circumstances, which is, of course, the reduction of inventory. Without this, we would have not needed to ask any, let's say, covenant. For the question number two, I believe that Karim or Roberto to explain. With regard to the question number one, EBITDA of the first 9 months. Yes, there is a difference in comparison with last year, which is partially due to lower volumes, again during the 21st meeting, we will give you a little bit more color about how much lower volume or what does this lower volume means. But also, please don't forget the subsidies or the returns that we have received last year from different government because of the incredibly high energy prices that the European industry has to face as a consequence of the war in Russia and Ukraine. So let me also give you and explain this. Someone has asked me to compare 2020 with 2023. Asking me a question of why is it 2023 worse than 2020. This is exactly wrong because, of course, if in 2020, you apply not even a similar incredible decrease of the value of inventory, but some inventory decrease that we didn't suffer during 2020. Plus, of course, you deduct the subsidies that were granted on that occasion because, of course, the continuation of the working contracts that we have in Italy, United States, Slovenia and even China. Well, of course, the result of 2020 would have been much worse than what it showed. So altogether, 2023 is a much better year than 2020. Sorry, if I, let's say, took a little longer to explain this. Now I will leave to give you exact explanations of this other cash cost items that are on Page 10.

That's the main item, just to give you -- the main 1 of the other cash costs, of course, it includes the interest cost that we are bearing during this financial year, which are, of course, not taking any -- which are penalized by the increase of the interest rate and help start at the end third quarter of 2022 and have continue until third quarter 2023. So that will be the main bulk of it. And of course, we can provide you later on more details, but that's the main part of it. And just to give you is more than 60% -- around 60% of the cost.

The next question is from Jan [indiscernible] of Momentum.

A couple -- just a couple of questions. The first 1 is on Econyl where the growth is coming from. So what I'm interested to understand is if the current customers are buying more or if you are winning more customer for Econyl branded products? That is the first question. The second question is regarding the covenant holiday. You mentioned credit institution. So are you talking only to banks or it's also involving the private placement?

Talking also the private placement, which I mean is a process that has already started some weeks ago, and we are now during the reiteration of providing, let's say, more data. Clearly, sometimes it's a little hard to provide more data until we communicate them to the market. So today, it will be easier to give them some additional information. After the 21st, we should complete the picture that we will deliver to our, let's say, lenders. With regard to Econyl, we are winning, let's say, market shares as well as gaining new customers. The new customers are both in the DCF or the carpet flooring market or the fiber for flooring as well as in the nylon textile for the apparel or garment application. In the future, of course, we will start developing Econyl also for the engineering plastic and for the polymer market, which we have just started. A lot of Econyl is now winning attention also in the automotive sector, both for carpet flooring as well as for, let's say, textile application. Of course, carpet flooring is easy to understand what is the application. With regard to textile, we are speaking more about car interiors and car seats where we have got some nominations. Some of them very, let's say, important from a marketing standpoint like Maserati, as you can imagine, that we do not sell million. I wish them, of course, to send millions of cars. But others that are more on [indiscernible] and on other, let's say, carmakers are, let's say, delivering more volumes.

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

Thank you. Thank you to also staying with us on our conference call, and see you on the 21st of November in Milan for our event.

It is, of course, physical and also virtual for those who are not able to take a plane or drive a car and to come and see us in Milan.

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