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 2024 Results Webcast. [Operator Instructions] Now I would like to turn the conference over to Giulia Rossi, Investor Relator. Please go ahead, madam.

Thank you, operator. Good evening, everyone, and welcome to Aquafil quarterly investor conference call. Today, we will update you on company's first quarter 2024 performance. 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 statements. For a discussion of these risks and uncertainties, you should review the disclaimer in the presentation we issued today. I will now leave the floor to Mr. Giulio Bonazzi for his remarks.

Thank you, Giulia. Good evening to all, and thank you again for attending our video conference. The first quarter 2024 confirmed our recovery path towards the achievement of our planned targets. The first 3 months of the current year, the EMEA and Asia Pacific geographical areas recorded volumes exceeding those for the same period of the previous year. Demand for fibers for carpets and polymers grew in EMEA. As for the product line relating to fibers for garments, the weakness that characterized the full 2023 continued. Asia Pacific further expanded on the market of fibers for carpets in terms of volumes. The United States showed a subdued performance in both product lines, thus reflecting the uncertainty context of the first month of the year. We expect a recovery in the second half of 2024. Engineering Plastics project confirmed the growth expectations for the period. Sales of ECONYL branded products further increased, accounting for over 52% of the Group's revenues generated from fibers. Activities continued with the aim of rationalizing personnel costs and containing investment, both below the previous year's level, in addition to optimizing working capital. The company remains confident that the targets set for 2024 and 2025, two-year period, will be cumulatively achieved. Thank you, and we are now ready for your questions.

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

So on the guidance for 2024 and 2025, I'm particularly paying attention to the word cumulatively. Does this mean that there's some expectation of the EUR 76 million to EUR 80 million EBITDA for 2024 maybe slipping into the 2025 forecast? I just wanted to see what -- how the management views this?

Well, in reality, we never give guidances for the current year. And so we stuck on the business plan that we delivered last November. That's why we expressed our sentence cumulatively, we think that we will reach, let's say, the results. That's the reason why.

Understood. Okay. And then on the -- it seems the caprolactam prices have gone up in the recent quarters, a couple of quarters. Is there going to be an impact of this on your profitability? Or is there a lag and you might have some low-cost inventory that will support margins for the next couple of quarters?

Well, thank you for this question. In reality, what we have experienced during the first quarter and also during the month of April has seen caprolactam price increasing, I would say, in a pretty large amount. And this, of course, is impacting the first quarter results as well as very likely the second quarter one. Even if April and May have remained at the same level, we have now, of course, the idea about June and as normally happening at the adjustment of the third quarter starting from the first of July of 2024, we'll fully recover these caprolactam price increases, which, of course, will leave an impact on the first semester results.

Understood. And my last question is on -- it seems the outlook calls for -- or at least the commentary calls for a second half of 2024 recovery in the U.S., what is your visibility? Like what is the sort of signals or evidence that you are seeing in the market for the U.S. recovery in the second half?

Well, both businesses like the carpet Yarn and also the Aquafil O'Mara are insisting a lot on, let's say, upholstery as well as, of course, of carpet. Of course, our carpet Yarn in U.S. is more related to automotive and commercial, while the Aquafil O'Mara is more on the residential and not only on commercial. That being said, our, let's say, feelings about what is happening during the last weeks and what our customers are reporting, it is taking our hope for this recovery. So our customers are saying that the order entry starting from February have increased, but they are still working on their inventory levels in order to bring them to the desired level. So in reality, they are buying less than what they are consuming. That is why we are let's say, considering this recovery for the second half that was already included in our budget for 2024. Moreover, one of our American competitors for carpet Yarn has announced recently the exit from the carpet Yarn business at the end of 2024. So later in December 2024 or January 2025, which, of course, will bring further market opportunities for the year to come.

The next question is from Niccolò Storer with Kepler Cheuvreux.

I have a question about your price and sales mix that you show on Page 4 of your presentation. If you can elaborate a bit how much is price and how much is mix? And then second question on NTF. Talking more in general also, not just focusing on the U.S., are you seeing any signs of life that can translate into a recovery later in the year?

Well, the part that we normally like most is related to commercial carpet. This is the normal part that is expressing because of our competitiveness, especially the best, let's say, marginality. But also the other applications are not that also we must consider that there are geographical differences when we sell in Europe or in United States or in Asia Pacific. As well as, of course, the differences, especially in the NTF business when we sell ECONYL versus a non-ECONYL product. So this chart is expressing of the differences, and I'm apologizing for not giving a super high detailed information about it. What we have seen in the first part of this year has been slightly lower commercial sales in the carpet Yarn business in Europe and U.S.A., while the rest of the businesses have performed even a little better than expected in Europe. And maybe not as expected in United States, the Asia Pacific market, especially the Chinese, Japanese and the Oceanian markets have performed in terms of quantities, I would say, in a satisfactory way. The Polymer market has been pretty good, at least in the first 4 months of this year and especially our new investment in the Engineering Plastics sector, has given us some good satisfaction. And we expect that during the coming years, it will give us the opportunity of growing our sales, especially in Europe. So this is with regard to the comments that I can release about this chart. Sorry, if I don't go in higher detail. Then, sorry, Niccolò, did you ask for a second question?

About...

Yes. The American NTF has got, let's say, a big decrease, especially during the month of March and April, while April better than March and May better than April. In the meantime, we have worked in order to reduce our personnel costs, I would say, reducing around 20 full-time equivalent in order to match the current status of the operations with the level of employment that, of course, should give us a good release in terms of EBITDA, let's say, starting from the month of June. Our expectations because of all the actions that we are implementing is to return to, let's say, an expected level starting from the third quarter of 2024.

The next question is from Dave Storms with Stonegate.

My first one is just on -- in Europe, what kind of pacing should we expect as the recovery continues? Is there any anticipated lumpiness in your forecast?

Sorry because my operator was changing the tone of your voice. I lost at what kind of and have lost your words.

Apologies. What kind of pacing should we expect in the recovery in Europe? Is there any anticipated lumpiness? Or do you anticipate that will be fairly linear?

Well, let's say that if we compare quarter-to-quarter, the second quarter of last year was very bad. So if I look at the second quarter of this year, of course, neutralizing the effect of the higher raw material prices that will be recovered, let's say, in Q3. I mean, in the European market, we are pretty satisfied, and I would say in line with our expectations. The energy prices and, let's say, the quantities, yes, we would love maybe a little better marketing mix in order to show products that are giving us more satisfaction. The ECONYL share is still on the rise or holding. In this case, it's automotive market that is giving us good results when we speak about usage of ECONYL in the carpet flooring market. So Europe, I believe, is not a problem. The major problem last year was Europe. This year is maybe a little less good than expected the results that are coming from the North American market, both from the carpet Yarn and the NTF in that market -- geographical market area.

Understood. And then in the U.S., if and when volumes return, how do you anticipate that you can now, as a percentage, to be able to keep pace with that?

Well, we never give, let's say, precise numbers divided by geographical area. But what I can comment is that the area where ECONYL has a deeper penetration is Europe. Then we have markets like Japan that are 100% or 99% ECONYL-driven. But let's say, the area where the ECONYL share is higher is Europe for obvious reasons because, of course, we started earlier in Europe than elsewhere. And secondly, also because the automotive market in Europe has accepted more quickly this concept, while the American market is taking more time.

[Operator Instructions] There are no more questions registered at this time. Excuse me. We have 2 more questions. We have a follow-up question from Joshi, Sameer with the H.C. Wainwright.

Last second, Joshi.

Yes. Actually, just one more -- are you on target for lowering the debt for the year? I know there is a slight increase, it seems, this quarter, but are you still targeting lowering of your debt for this year and next?

The most important target that we are taking care is our debt. So we would prefer -- of course, we would like to, let's say, finalize all our targets, but be sure that the target that we are taking more attention is related to our debt. So in reality, when we delivered our results, we were keeping some reserves in terms of capital expenditures and the possibility of, let's say, containing the working capital. And I can tell you that for sure, we will deliver the results for the end of this year. We are very confident about it.

The next question is from Luca Orsini of One Investments.

Just a clarification question. You said you -- in the press release, you said that you confirm your guidance for 2024 and '25, out from the plan? And you say "cumulative," what you mean by cumulative?

As I said, when Joshi asked for this question, we are never releasing, or if not in special cases, guidances for the current year. So I'm not -- we have never delivered a budget for 2024 -- forecast for 2024, but we have delivered cumulative forecast last November for the year-end of 2023 and for 2024 and 2025. Then, of course, everybody started to guess what would have been the result of 2024, the net financial position of 2024 and 2025. So that's why I'm still keeping this position. So sorry, for the time being, we are not yet delivering any guidance for the present year. But we are still confirming that for, let's say, the 3 years that we have planned, we will -- we're confident to be able to strike our targets.

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

Sorry to go back to the same question about 2024 guidance. Actually, if I take your business plan presentation, I see that you indicated some target EBITDA for 2024, also some target net financial position. So...

Yes, but they were not, let's say, budget forecast. We gave a target and then we gave some kind of ranges that we wanted to hit that was our, let's say, idea, but we never gave you a precise number like 73.2% or 82.5% or so. This is what I meant when I said we never gave, let's say, a precise -- an accurate forecast for the year, and we stick on this position. Then, of course, you are right. When we delivered our plan in 2023, there were some, let's say, targets that we have shared with you guys. And we will see during the next quarters where we are. And what kind of, let's say, explanations or results we are able to share together with it. As I said, for us, the most important part that we want to achieve is our net debt reduction, and we are very much focusing on, as you can imagine, of course, until the market doesn't bounce back, we have enough capacities for delivering quantities to the market. So we don't need to make, let's say, special capital expenditures. The only place where we are spending money presently is in our Chinese operation, where beginning of this year, we were enforced to send material from Europe to China, which as you can imagine, is something that is not very efficient in terms of margins as well as in terms of working capital, also because while we have seen this raw material price increase in Europe, that is driven by what our suppliers are saying, mainly by the blockade of the Suez Canal because some raw materials were coming from Saudi Arabian or Gulf refineries as well as also the second reason was the lower usage of Russian crude oil which is heavier in comparison with the crude oil mix, which is currently used by the European refinery, which has caused the shortage of sulfur. And this has caused in the chemical business, not only in our special activity, some shortages of some chemical product. And this has given the opportunity to the European suppliers to increase prices, which didn't happen in Asia Pacific, specifically China, prices were very, very resilient, as well as United States, they have increased, but much lesser than what they have increased this year in Europe. So there has been quite a bunch of speculation if I can define it. So this, of course, is causing a lower margin than expected for us in the previous 2 quarters that will be mended from the Q3. There could be also some better margins from the Q3 and the Q4. The raw materials in Europe will start to grow apparently, raw material prices in Europe are somewhat around 25% higher than in Asia Pacific, which is not the situation that can last for long or we will be flooded by Chinese materials.

Ms. Rossi, gentlemen, there are no more questions registered at this time.

There are no more questions. Let me thank you for participating as well our first quarter financial results, and we hope to see you in the next quarter financial results.

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