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

[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 the 2023 results. Before going ahead, let me remind you that this presentation might contain certain statements that are made to reported financial results, not at the 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 state. 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 video conference. The year 2023 was characterized by strong volatility of the reference market. The trends anticipated during the presentation of the company's targets last November were confirmed by the group's consolidated results. Overall, the year just ended showed a modest volume decline compared to the previous one, though with different dynamics across the various product lines. In the fourth quarter, demand in EMEA exceeded the debt recorded in the same period of the previous year for both fiber for carpet and polymers. As for the product line relating to the fibers for garments, the strong weakness that characterized the full year continue. In terms of volumes sold, the United States showed a slightly weak performance in the markets of fiber for carpets and for garments. In Asia Pacific, volumes sold remained substantially aligned to the 2022. The engineering plastics project in EMEA reached the objectives set for 2023, thus confirming the growth expectations for the next 2-year period. Margins significantly decreased as a result of the sharp decline in 2023 of the high unit value of inventories stocked in 2022 with an effect on the year of EUR 24 million. Volumes sold of ECONYL branded products exceeded the previous year levels. The group confirms the operating and financial results previously announced while continuing to pursue the strategic goals of increasing productivity and energy efficiency as well as reducing cost and containing debt. Thank you. And now we are here to answer to your questions.

[Operator Instructions] The first question is from Joshi, Sameer with H.C. Wainwright.

My first question is on your outlook for 2024, 2025. You have reiterated the outlook that you gave previously. What gives you the confidence? Do you have visibility in how the regions are working out? And just wanted to see what challenges could emerge that could change this outlook.

We gave these targets during our video presentation of last November based on forecast given by our customers and on certain assumptions. We are pretty confident to reach especially the debt reduction target because, of course, we have some reserve in terms of capital expenditures during the next 24 months. But nevertheless, the year started in terms of volumes, pretty aligned with what we were expecting. Now of course, with usual differences that you may find between different areas. We can confirm, as I have just said during my first speech that the European area is performing slightly better than expected. The Asia Pacific area is on the rise in comparison with the 2023 levels while unfortunately, the United States in both businesses is showing a weakness which is, in our opinion, mostly driven by the expectation of future decrease of interest rates that unfortunately are not materializing. So please remember that our business in U.S. is strongly dependent on construction and automotive, which are both places where the consumers normally can wait for some months in the expectation of a decrease of the interest rates. But other than that, for example, a challenge that we are facing in this couple of months is the Suez Canal and the Red Sea problem because, of course, transportation are creating problems to the European chemical industry in terms of procurement of raw material coming from the Arabic peninsula, which is causing a sharp increase of the raw material, which will be recovered during the second quarter. But again, what I can say is that, for sure, we are pretty strongly controlling our cost structure. Our restructuring is continuing, where, of course, the demand is not returning to levels that are more satisfactory with the previous years, and we will continue to push you the policy, the politics of reducing our leverage in, let's say, containing our cost and keeping our cash flow in terms of capital expenditures.

Great. Great. Really helpful. On the Engineering Plastics project, you said that it is progressing well. And you see in the next 2 years, it's going according to your plan. What is the market size that you are planning to address with this? And what level of revenues do you expect maybe in 2024 and 2025, I just would like to understand that.

Well, Engineering Plastic for us in Europe is a long-term project. So we have invested something like EUR 12 million, EUR 13 million during 2023. And then at the end of the same year, we started up the first line of our operation. Now both lines are operating almost at full capacity. And it's a continuous work in terms of improving efficiency, increasing the output. And then from now on, we will start also our actions in terms of bringing to the market better products in terms of margins. We made this investment for several reasons. First of all, we intend to recover as we are. There is production of fiber waste, which is naturally coming from our core business of making fibers. Before we were selling these fiber waste to a third party according to a contract that has aspired completely at the end of last year, so this is a way to give better value to this stream, which, of course, we try to avoid to make every day, but it's impossible to go to zero. Secondly, we wanted also to keep how can I say, support of our polymerization in order to have a good operation rate. Of course, with the future idea of developing and introducing into the market, ECONYL products also for the engineering plastic industry where we are, every day, bringing to the market samples and introducing ECONYL to several new customers. We have already some, but of course, it will take a while, but we intend, of course, to develop many as we were able to make also in the carpet and textile industry. So these are the main reasons. If we look at our polymer and engineering plastic, let's say, area of business, which we internally keep separated is today something which is above 10% of our revenues, but that we count it is going to increase during the coming years and will support our revenues in our European area, where during the last, let's say, 3 to 4 years, we have shown more difficulties in growing our revenues, while in Asia and United States, we have more confidence because, of course, our markets where Aquafil has a lower market share. So there are still possibilities of gaining market shares against other players or in case of Asia Pacific, very likely following the growth of the real estate market and the automotive market, which is still taking place differently than in our area.

Got it. One last one, quick one, I guess. You have the 60% target for the ECONYL as a percent of fiber revenues. During 2024, should we expect it over the 49.6% that you saw in 2023, like 52, 53, 54? Do you have any number in mind targeted?

Yes, of course, we have because we have a budget forecast, but forgive me if I will not declare them loud. We are working hard, of course, to continuously introduce new ECONYL products into the market and still the acceptance and the resilience of ECONYL is shown also by the last results. For example, the Japanese market that we are penetrating lastly in Asia Pacific is more almost entirely coming from ECONYL products. In the last quarters, we have also introduced ECONYL into the residential market in Australia, which will be, of course, a niche. But we are, as said, continuously introducing ECONYL products as well as also during the coming quarters and especially 2025, we will introduce also some new technologies for validating different fiber waste streams that today are unrecyclable, but coming from the nylon textile industry. So this will be very, very important to give the possibility to our customers to think to make products that are recyclable and at zero waste, okay? So what can I say? We are still confirming our target of reaching or, let's say, approaching the 60% level at the end of 2025, we have enough capacity from the upstream and we are working harder and harder in order to continuously improve our ECONYL performance also in terms of cost.

The next question is from Niccolò Storer with Kepler.

The first one is on volume expectation for 2024. You talked about the beginning of the year line to your indications provided in November. I was wondering if by product category, this is also confirmed for NTF? Where you are expecting a particularly strong recovery after the weak 2023? And the second question and last one is on efficiency measures you have anticipated in November. If you can give us an update on where we are now on that front. Sorry, maybe a last one, very last one on energy prices, we have been seeing quite sharp decline in gas prices. And I was wondering if this could potentially bring some upside to your EBITDA guidance in 2024.

Well, NTF strong recovery, I would not define like that because it's a partial recovery of the big loss that we posted during the last year. So strong recovery will be when we recover fully the loss of 2023 and maybe also we gained some further sales. We're expecting the NTF still a weak first semester because the destocking in this area of business last unfortunately one year, while in the carpet industry is taking much shorter. That is why last year, if you remember, we have got a particularly weak April and May in the carpet industry in Europe. And then starting from June, we have seen step-by-step recovery arriving to the fourth quarter, and I confirm to you also during the first quarter of 2024 to something which is even slightly better than last year and then our expectations. So our volume expectations for 2024 are overall confirmed with very likely some differences in the geographical areas and in the product categories. But of course, our global positioning is always or at least so far, it has helped always to respect our projections and our forecast, thanks to the fact that when there is a weak area, normally, there is another area which fortunately for, say, structural reasons is performing better than the other one. Efficiency measures, last year we targeted a personnel reduction of 200 people. This has already reached, and we are still continuing this work of reducing our labor cost, which, I mean, it is decreasing more than the inflation is increasing, thanks to this strong action of cost containment. This is particularly said because nobody, of course, would like to reduce the personnel. But until now, that's been made without, let's say, the problems because believe it or not, especially in Central Eastern and European countries, there is still an unbelievably strong demand of labor. So it is sufficient with small actions to, let's say, not substituting the people that are, let's say, leaving us or changing job. Hopefully, the market will recover. And so we will not be obliged to continue this work. Energy prices, energy is important for us, particularly important when we speak about ECONYL. But of course, ECONYL is made by raw material. Fixed costs are basically represented by labor and energy. So the work on the fixed cost is the one that I have just mentioned. The work on energy has been made with last year in the middle of 2023, the start-up of a new power plant for generation plant in Slovenia, that will help us, also thanks to the lower natural gas prices to have a steam procurement at a much cheaper price than we were buying from the local power station. That was also changing, so it was absolutely necessary to do, which maybe Karim and Roberto will explain to you later, has also given some kind of, let's say, higher leverage in our balance sheet. Without this investment, our leverage would have been EUR 16 million lower and this because of IFRS 16, in reality, the plant is only operated by a third party, a large, let's say, most utility coming from Germany. But of course, our auditing company has written the theoretical cost of the next 10 years rental of this, including all the maintenance fees that are correlated. So we are, how can I say, having the depth, but leading the part of the margins to a supplier, this is how they say, things that we have not been able to fix and to adjust with our auditors. But okay, this is giving us a big advantage in terms of cost, both electric energy and steam, which is absolutely super important when you are producing equally. So yes, this is giving us some, let's say, margin, especially with our budget forecast, of course, we will see also how the market is going to perform.

The next question is from Carlo Maritano with Intermonte.

I just have a couple of questions. The first one is on financial cost for 2024. I was wondering if your assumption that you -- the assumption you provided in the business plan are still consistent with the expectation given the negotiation of the covenants with financial institution? And the second one is on net working capital. In the fourth quarter, you achieved a remarkable EUR 40 million decrease compared to a previous period. So I was wondering if you expect this level could be further shrinking in the future? Or you believe that an expansion will be necessary given that you expect the volume growth?

I leave the floor to Roberto, who is the CFO.

So I will take the first question. In relation to the financial cost of 2024, yes, we do confirm what are the expectation and the part that we gave. In terms of covenants and waiver received, the cost is neglectable and there's basically no impact on our 2024 cost. We do expect, but we didn't feature in our financial costs. Possible yet almost sure cut of interest, which could potentially give us a little bit of upside. But overall, we do confirm our financial cost expectation provided before. In terms of net working capital, my personal -- I believe that what has been done during the 2023 has been a very good result. We managed to obtain and to squeeze our working capital in order to recover cash and being able to keep our net financial position based on the books substantially unchanged compared to the previous year. So I think at this moment in time, we have reached almost, let's say, the optimal level. There might be some potential upside here and there but not material in a way that we have seen in 2023.

Yes. If I can add a little of color, quantity-wise, we have reduced our goods and stock around 30%, which has been a remarkable decrease. So we are now working hard to keep this level and we are very much confident to be able to keeping this level during 2024. But of course, to further reduce it, it starts to be quite challenging because 30% is a big number which, of course, has also resulted in a loss in terms not only because of the unit value, but because we have sold something instead of manufacturing. This year, of course, we will produce what we are going to sell, which is, of course, helping our shops in order to have a better efficiency.

The next question is from Dave Storms with Stonegate.

Just curious how you're thinking about pricing and the ability to maybe pass through some of those costs with the expected increase in volumes in 2024.

Well, pricing, we have to take a little time to explain. So when we are speaking about the carpet business, we have, let's say, a habit with our customers and the industry to pass through the raw material price increases with a delay of one quarter. This is particularly true in Europe and Asia Pacific, then we have markets like USA that are reacting more on a monthly basis than on a quarterly basis. Then, of course, there are differences when we speak about automotive, final, let's say, destination of our products or residential or commercial. In the automotive, normally, we don't see when the raw materials are declining. We don't give 100% of the decline when raw materials are increasing, we are not asking for 100% of the increase because, of course, the final customer is, how can I say, behaving more regionally, if I may say. So -- but you can see historical, you can see the series of the last 20-plus years, we have always been able to pass through as well as we are very seriously returning to the market, the decrease of raw materials when raw materials are going down. 2022 and 2023 as well have been particularly special because we have also, let's say, met or we have worked in a high-inflation environment. So not only the raw material prices have been accounted, but also labor, transportation, energy and so on. And during 2023. let's say, 4, let's say, the factors that have actually decreased, mainly energy and transportations, we have recognized to the customers, let's say, this kind of decrease. This is our way of working. So if we are so good in passing through the price increases is also because we are serious and transparent with the market and the customers when, let's say, some costs are decreasing. So we are trying to share good and bad market moves. For 2024, we have seen January -- December and January, let's say, traditionally weak in terms of raw materials, then we have seen an increase in February and another increase in March. This especially in Europe and the United States. But we have seen, in the same time in March instead of an increase, decrease of the prices in Asia. Overall, the market is not demanding more. Overall, the global market demand is not, let's say, healthy or improving. But there are dynamics that are different. If the Saudi Arabian Peninsula is not shipping raw materials or petrochemical raw materials into the European market, they are likely to ship them when possible to Asia. And this is causing this big variation between Europe and Asian prices that, of course, for us, are or may represent an advantage because the windows of arbitration are opening. So if you're acting quickly, you can sometimes buy raw material in Asia, transporting them into Europe and gaining some, how can I say, small competitive advantage with, let's say, the competitors that are acting only [indiscernible]. So we are expecting overall market price, which is not dissimilar or at least, this is our forecast to the one of 2023. Initially, we were thinking to a slight decrease. We are now in reality, on a slight increase on our projections. For sure, we are not expecting big differences like one of 2022 going up or the one of 2023 going down. So also to answer to Sameer, of course, the outlook of '24 will be dramatically supported by not having EUR 24 million of depreciation of our inventory that has caused the big loss of 2023.

[Operator Instructions] The next question is a follow-up from Dave Storms with Stonegate.

Just one more if I could. But the expected increase of ECONYL volumes, how much of this expansion is expected to come from current customers and how much of it is dependent on acquiring new customers?

Well, I would say that today, our customer base of ECONYL is a pretty large and eradicated. So we are not expecting many new customers. We are expecting, let's say, our present customers with some also new ones growing our product lines having ECONYL inside. Please consider also one factor. ECONYL demand is growing faster when raw material prices are high because, of course, the customers are finding also, I can say, cost advantages or less disadvantages, if I may say. So when, of course, oil prices and oil derivatives and fiber intermediate prices are high. So clearly, they are also becoming more confident, launching products, also maybe in the medium, low end of the market. 2023 has been a year of a very low market prices in terms of fiber intermediate products. So clearly, the market has not been very, very active in this respect. It was just the normal growth that we have, let's say, developed during 2022 and 2021. So we are now expecting a new flow of request of sampling of new product development as well as, of course, we are actively continuously introducing ECONYL into new product lines, like, for example, technical yarns for robes, fishing nets for those who are following us, you will have noticed some communications with regard to ECONYL entering also the space of the fishing nets both in Europe and in Asia with some Japanese customers. This also thanks to the cooperation that we are having with ITOCHU Trading or Sea Eagle depending how you want to call that. We have launched also some products as technical globes. We are launching now some new products [indiscernible] as well as also in the textile area for different application. It's a continuous development, searching for new markets, for new customers as well as also for new applications.

[Operator Instructions] Mr. Tonelli, gentlemen, there are no more questions registered at this time.

Thank you to all. Thank you to Giulio and Roberto, and thank you to all the people that joined our conference call, and we will see you till the next one during May.

And see you next week in Milan, because that's where we're coming. Thank you.