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 Group First Half 2024 Results Web Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Giulia Rossi, Investor Relator of Aquafil. Please go ahead, Madam.

Thank you, operator. Good evening, everyone, and welcome to Aquafil Investor Conference Call. Today, we will update you on company's first half 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 the 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 half of the year, we marked a steady and continuous improvement of the group, which is now close to returning to ordinary profitability. As usual, the various product lines and geographical areas showed different dynamics. Polymers and fiber for carpet with the exception of the United States, reported a progressive recovery while fiber for garments continue to show some weakness. EMEA, after showing significant weakness last year, recorded a recovery in volumes of fiber for carpet. Asia Pacific also saw a positive trend in volumes while, unfortunately, the U.S. market represented a negative surprise, contributing to the reduction in overall profitability. In the United States, both fiber product lines recorded volumes below expectations in the first half of the year, although BCF shown improvement in the last weeks. We expect better results in the second half of the year and the special in 2025. In relation to costs, the actions aimed at personnel rationalization and the optimization of working capital are essentially finalized and are generating the expected results. With regard to the second half of the year in EMEA, a recovery in the market of fiber for garment is expected. As for fiber for carpets, volumes are expected to remain in line with the first half of the year. Polymers continue the announced growth path. In the United States, the second half of the year is expected to show a slight improvement in both product lines compared to the first 6 months of the year. In Asia Pacific, the volume trend is aligned to current year budget estimates. In light of the improvement of the company's economic and financial situation and in order to accelerate its growth process, the company has approved the new 2024, 2026, 3-year plan. We want to be ready to seize the growth opportunities that arise in this unique period and aim to strengthen our position with a capital increase. Thank you. We are now ready to welcome your questions.

[Operator Instructions] The first question is from Dave Storms of Stonegate.

I have 2 questions in relation to the press release that you put out today. The first one is with regards to the North America market and just kind of what you're seeing as far as turnaround activity there? And then the second question is with regards to the CapEx spending that you're expecting over the next 2 years. The press release mentioned significant technical improvements. Just any more color you can give us on what those improvements will hopefully look like.

Well, thank you, Dave. In reality, in the North American market that we suffered a temporary loss of volumes driven by the early termination of a contract that was in line in, let's say, working between Aquafil U.S.A. and a local player who last year, given the weakness of the residential carpet market, has asked to terminate the contract earlier than scheduled. In line with our budget expectations, we decided to welcome this request by the customer also considering that if we didn't accept, next time they would have never asked for the same kind of support. Honestly, we were expecting a better demand coming from the automotive sector as well as also a quick recovery from the switch of INVISTA product lines to Aquafil's product lines. Clearly, the automotive market, as it is known, has not performed. So well, even if recently, we are seeing some slight improvement as well as the expectation of the switch between INVISTA and Aquafil product lines has taken a bit longer, but is now finally taking place. Also in the meantime, another local player namely, [ Ascend ], has announced publicly that they will cease, they will stop BCF production at the end of 2024, given, of course, the remaining 2 companies operating in the North American market, the possibility of gaining further sales. This is why we are relatively, let's say, optimistic for the next year. With regard to the CapEx spending, let me tell you that in a few days, we will have a session when we will present the new guidance for 2024 as well as the business plan for 2025 and 2026 where we will give, let's say, our projections and also our ideas with regard to venture further investments when the capital increase will be realized. But nothing, let's say, super large or dramatically large, some CapEx that we are holding since, let's say, 12 or 18 months waiting for the return to a better ratio between our EBITDA and the net financial position, but I am giving extremely interesting results, and we would like of course to start making these investments as soon as possible.

The next question is from Amit Dayal of H.C. Wainwright.

You are expecting some volume recovery in 2025. Can you talk a little bit about what are the drivers to support those expectations?

Yes. Well, let's start from the easiest, which is Asia Pacific region, which has always shown a positive trend since we started operating there in the year 2007. We are expecting some better, let's say, revenues and better sales because also, we are going to introduce special technology that was not available in Asia Pacific yet. So we were operating this technology successfully in Europe and United States, and we are now going to implement this technology in Asia Pacific in order to follow the local growth of the commercial and automotive industries that are the 2 main final market for our carpet yarn activities. With regard to Europe, we are expecting a consolidation of the European or the EMEA -- so-called EMEA market. Clearly, last year, we have suffered, especially during spring and summer, a very big downturn that this year has not taken place, but we expect a slight improvement also and again deriving from the announced stop of production of another player here in Europe called [indiscernible]. So we are not, let's say, dreaming for a strong pop-up or recovery of the market, but we are just, let's say, taking profit of the consolidation, which is happening in the North American and European market. With regard to U.S., what we are seeing is that during the last NeoCon exhibition, all the players, all the carpets, that were previously using INVISTA as, let's say, important supplier, I remember that INVISTA stopped the production of BCF around 2 years ago, finally launched all the new product lines and collections made with our ECONYL fiber. And so we are expecting, of course, a ramp-up of this new collection as a substitute of the past stage. So it is still an improvement coming from the past. It is difficult to imagine a strong recovery of the market overall, but maybe in the European nylon textile filament industry, which has suffered downturn of low -- more than 30%, which was, of course, including a strong destocking of our customers that has now finally taken place. For sure, we are not forecasting neither in 2024 nor in 2025 to return to our levels of 2021 and 2022. But indeed, we expect some rebound in comparison with the last 12 months that have been particularly weak. So this is the kind of scenario that we are going to explain in a few days, also speaking about the business plan. With regard to the polymer and engineering plastic market, every market studies are reporting a growth of around 3% per annum. And I remember you that we have 0.1% of the European engineering volume and market. So we are not, let's say, an important player nor we are considering to take 5% or 10% or 20% of market share.

Understood. And then on the pricing environment, should we expect some stability or maybe some pricing pressure over the next 12 months?

Good question, Amit, also considering the big swings that especially the raw material market, the [ suffer ] in Europe, in particular, because of COVID first, then the recovery after COVID and then, of course, the war and the energy prices and lately in the first 6 months of 2024 because of the transport prices driven by the Suez Canal and the Red Sea transportation, which is practically blocked. What we have seen during the first semester has been increase of raw material prices, especially in Europe, partially followed by U.S. and not, let's say, confirmed by China and Asia Pacific markets. What we are noticing now is a return to a normal level and to a more coordinated global pricing of the raw material. Despite the transport system is still suffering big cost, especially when shipping from Asia to North America or from Asia to Europe. This is what we're seeing. So in our planning, we are considering a stability of the price in relation to the raw material market. You know that Aquafil has always demonstrated to be able to increase prices when the raw material was increasing. So we are not considering to improve our margins or better to improve our prices. Eventually through cost optimization, we can improve our margins, but we are considering to keep and to have a stable marginality on our product lines.

Understood. Just one last one for me. For ECONYL, you're seeing pretty strong year-over-year growth, sequential growth also 50% plus. Do you think that will continue or maybe some moderation on that front?

Well, in the first semester, ECONYL fiber revenues have [ passed ] the level of 50%. We are in the range of 52-point something percent, so still growing in comparison with last year, with big differences market by market. As you can imagine, Europe is having a bigger penetration of our ECONYL products. North America is the second and then followed by Asia Pacific, which is, let's say, lagging a little bit behind. Let's say that, we are still seeing a lot of projects in relation with ECONYL in the fiber business. But now we are also starting to see good news, some interesting projects also in the engineering polymer market for 2025. So we are pretty sure that the ECONYL trend will continue during the next period.

The next question is from Niccolò Storer of Kepler Cheuvreux.

Just a clarification on the proposed capital increase. I see on your press release that basically you have both the proposal for a standard capital increase with preemptive rights and also a proposal for a capital increase without preemptive rights. Does this mean that we could expect the mix of the 2 for a total of EUR 40 million? Or that it's EUR 40 million plus EUR 40 million, should we interpret that?

Thank you, Niccolò. No, no, the total amount that we are looking for is EUR 40 million also because, as you will appreciate by the new business plan, and we think that this is exactly what we need or slightly less doesn't make a big difference, of course, in order, let's say, to let us develop our business plan and the additional CapEx, okay? So with that being said, the Board of Directors has decided that to give flexibility because I mean, should appear someone interesting from a strategic standpoint that expresses desire of participating to the capital increase, partially or totally. At this point, we want to eventually consider this possibility. Clearly, at this stage, we don't have anything, let's say, on the table other than a classical capital increase with, of course, including the preemptive rights of the present shareholders. But I mean, we are reading -- or everybody is reading, holding my opinion, let me express this definition, sometimes a little incredible fundraising of start-ups that are trying to follow what Aquafil has introduced 10 or 15 years ago. So who knows, maybe someone may come and give us interesting possibilities.

The next question is from [ Andrew Lawford ] of Fund Scouting & Advisory.

Just following on from the question about the capital increase. If you do have a strategic investor, does that mean that the controlling shareholder would participate together with them? Or would they be diluted as well? And do you have an idea of how deeply you're going to have to discount the pricing of the shares of the new shares issued? Have you had any discussions about that? And just sort of connected to that, how is the relationship with your lenders? And is the capital increase in some way being suggested by your creditors as well?

Well, let's start from the pricing, that will be decided as soon as council approves our prospectus and also considering the market conditions and the possible acceptance by the market that we are going to investigate during the coming weeks. As you can imagine, we have not had the chance to go by our shareholders or by other investors to make a presentation about our business plan. So during the coming weeks, we will start investigating, understanding how this, say, proposal is accepted or welcomed. And then clearly, we will decide. Let me make a personal, let's say, a comment, I think that the current market price of Aquafil is already largely discounted. So I hope that the Board will not accept a super, further discount on the price. And also, we have an interesting business plan. So I don't see why clearly to give such a discount, but it will be the Board to decide, and this will -- the decision will be made upon, of course, the acceptance and the feeling that the market will return to ask our creditors, I don't see the problem. The numbers are showing that we are going, or if nothing particularly strange happens, we are going to expect our covenant. The capital increase is not made because of covenants breaching but because we want to grow faster and not waiting for another 12 or 24 months before moving ahead with certain investments that are very, very interesting. And we expect that other opportunities may arise in terms of consolidation in the market. But if you want to take them, you have to have financial resources for, of course, consolidating. If not, you have to pass and this is not, let's say, a good idea for granting the bright future for the next 3 to 5 years to the company. I don't if I answer more of your questions?

Yes, that's very helpful.

The next question is from Anthony Mannara of CI FirstEurope.

I just wanted to ask, were there any European normatives or legislation that you know that might be imposing some kind of a catalyst for further market growth for you to take advantage of the changes that are coming -- that could be coming in Europe or in the United States. One thing that comes to mind is the amount of carpet in automobiles that needs to be recyclable. That was one of the topics maybe. Is anything like that that could be pushing? That's the first question. And during consolidation, you were talking about consolidation. Would you be a buyer of other companies? Would you need more capital if that were the case?

Of course, we would like to be the buyer and not the seller or the consolidated company, but you never know. If someone comes and offers the moon, I believe that for not only for the major shareholders but also for the entire shareholders of Aquafil, we have to consider it. This is quite an obvious answer. And maybe I didn't answer to Andrew before, the major shareholder intends to, of course, support the capital increase, okay? This is quite obvious. But if a third party -- an interesting and strategic third-party come also the major shareholder should consider to be diluted for, let's say, the growth and the good results of the company. With that being said, speaking about legislation, the legislation is evolving, okay? For example, in Europe, a directive about the end-of-life vehicle has just been approved that is asking to the automakers to include the 25% of post-consumer content on every plastic component present in a vehicle for 2030, so for tomorrow morning. Clearly, we have been, let's say, conducted by some carmaker understanding whether through our ECONYL, we can provide this 25% of post-consumer content. We have to see when this directive will be finally implemented by every single member state, the kind of finds that the commission will go into impose and also the definition of recycling content because, of course, the devil is in the details. So we must also understand the definitions. We know all about the extended producer responsibility legislation, which is now present in California, which is why we are collecting carpets in California. There are other legislations that are under discussions, but let me remember and underline that so far, all the results of Aquafil and ECONYL has taken place without any subsidy coming from any state nor for any particular legislation other than the one of California, supporting, let's say, recycling content in the final product. So we think that today, we have reached a technological level, which is quite high. We think that today we have still a lot of opportunities in terms of revenues and costs to be taken. And that's why we expressed his confidence in the future. Having turned the page and having returned to a better financial results in the second quarter, I remember to all that we have scored last 77% of EBITDA in comparison with last year, which is not yet where we wanted it to be. But of course, we think that the peak of the problems are on our shoulders. So it's time to react and possibly to try to take advantage of this situation because our competitors, unfortunately, are not in the same position.

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

Thank you. I will soon invite you to the new conference that we organize for the 12th of September when we are going to make a presentation about our new guidances and our new business plan, and also, we hope that you have enjoyed this half an hour together with us. Thank you very much.

Thank you.

Thank you.

Ladies and gentlemen, thank you for joining the conference. It's now over. You may disconnect your devices.