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 Quarter 2025 Results Web Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Giulia Rossi, Investor Relation 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 quarter 2025 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 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 quarter recorded an increase in profitability compared to the same period of the previous year and this despite the global economic context that continues to present challenges and uncertainties. This result is a consequence of the U.S. market recovery for the fiber for carpets and the increase in sales of ECONYL products. The latter to our great satisfaction exceeded 60% of fiber turnover, achieving the target set for the current year ahead of schedule. The higher-than-expected trend in energy costs persisted in the first quarter, but subsided at the beginning of the second one. EMEA and Asia Pacific are substantially in line with the forecast. Appreciation goes to the engineering plastics area, which continues a virtuous growth process. The United States recorded increasing volumes even beyond expectations in the fibers for carpet business line. Unfortunately, the textile yarn has likely been affected by a front loading as a consequence of the tariff war. Order intake suggests the positive trend in the fibers for carpets and polymers product lines, while some weakness remains in the textile yarn sector. As anticipated, the introduction of tariffs has no direct impact on our business, while we are closely monitoring the indirect consequences that may affect demand. We are confident in achieving our targets for the current year and for 2026, creating long-term value. Thank you, and we are now ready to answer to your questions.

[Operator Instructions] The first question is from Tommaso Nieddu, Kepler Cheuvreux.

The first question is on the raw material costs that were quite beneficial for this quarter. So my question is, do you already have visibility on its dynamics in Q2, it seems like caprolactam -- as caprolactam price has increased a bit. The second question is on ECONYL, you already reached 60.5% on fiber revenues, which was targeted for the end of the year. So my question is, therefore, will you continue to try to increase its weight throughout the year or you are satisfied at this level? And then the last question is on utilities costs that were higher than expected. So would you -- or are you planning to take any action to make it less volatile considering that it is a material line in your cost structure?

Thank you, Tommaso. Raw material cost. First of all, let's try to make or to give a clearer picture. They have been lower than our forecast, but they had reason during the first quarter. So we have seen during the first quarter, a raw material price trend of increase, but this increase is, nevertheless, lower than our budget forecast. So this is why we are saying that it's bringing us an advantage. What is happening in the second quarter on the contrary is a decrease of the raw material prices. So we have returned to the prices of, let's say, December, January in the month of May, which means, of course, to have even a higher advantage in comparison with our budgeted raw material prices. When we speak about ECONYL, 60.5%. As you can imagine, we are quite satisfied. And we have given this announcement because it was, let's say, inside our targets that are inside our sustainability reports and our nonfinancial declaration. Clearly, if convenient, we will keep pushing and trying, of course, to differentiate ourselves through ECONYL regenerated yarns that are bringing in our opinion, a good advantage in the long term. Recently, as we have spoken about the engineering plastic, the ECONYL polymer has started also to mark its presence in this business line, bringing also some interesting results in terms of sales and profitability. Energy costs, we have let's say, given this kind of, how can I say, better cover because if you remember, at the end of last year, this was the major reason of the deviation from our, let's say, planned numbers and our actual ones. And as everybody knows, at least here in Europe, in particular, when we speak about natural gas prices, we have suffered during the first quarter and more during January and February, a very high price. Then starting from April, we have started to see a downward trend, which has taken back the actual prices to our budgeted numbers. But still, we have not been able to recover, let's say, increased cost that we have suffered during the first quarter. We have made some forward, let's say, purchasing of natural gas, but still limited because unfortunately, the prices available in the market are not so favorable. So we have been forced, I believe, like many other players to stay on the spot for the bulk of our consumption. What we have been doing in the last month is to study carefully not so much. And of course, we are working every day on trying to buy cheaper energies and utilities. In fact, we have strike a deal for electric energy for our Slovenian plant that is starting to bring in some advantages from the month of April for the future years. But when we speak about natural gas, what we are studying right now is to introduce some newer technology in order to reduce unit consumption, which, of course, should bring benefit, let's say, irrespective of any gas price that you might, let's say, suffer or have in the market. This is what we can do because, of course, cutting costs and cutting consumptions is always the best thing to do in the short, medium and long term.

Next question is from Carlo Maritano, Intermonte.

Just the 3 questions from my side. The first one is a follow-up on utilities cost. Can you quantify the impact that you had in the first quarter just to understand what would have been the margin [indiscernible] impact? The second question is on CapEx. I see from the presentation, the CapEx in the first quarter was EUR 4 million. Given that in the business plan, there's a target of EUR 35 million, I was wondering if it is just a matter of timing of there's some investments that have been postponed. And the final question is on the polymer business. You said before that starting from the -- that in the first quarter, the engineering plastic and good results. So I was wondering why the rest of the business declined so much?

Yes. Let's say, I will not give you the exact figure, but the impact on the higher in particular, natural gas prices has been more than EUR 1 million, okay? So clearly, this has got a major impact on our profit and loss numbers. And this, of course, should, let's say, return back hopefully during the rest of the year, but doesn't depend on us. It depends on many international factors. Low CapEx. Well, as you can imagine, I guess, like almost everyone, we are at the window, understanding whether this kind of uncertainty is, how can I say, bringing a market stable, declining or growing because, of course, I mean, it doesn't make a big difference that we eventually delay for 3 or 6 months, some capital expenditures, I mean, in the longer term, but it's better to understand what is making sense. I have also to say that these new technologies that we are starting to be applicable to our operations were not considered in the previous business plan. And this is also -- so this temporary suspension is giving us also the time to understand, which one is bringing more return, of course, it is better to make investments that are bringing more returns rather than others that are making less returns. Polymer business. I don't know if I have understood well your question. But let's say, our polymer business is having practically 2 legs, 1 leg, which is purely opportunistic, which is the sale of basic polymer. This is, how can I say, important for us until we are able to secure a certain operation rate to our polymer plants and no impact on our utility systems. Please remember that both in Arco and in Slovenia, we are operating or we are -- or there is a third-party operator of power plants, which, of course, means that we have some fixed cost that we have to consider, okay? And in case also you buy forward, for example, natural gas, you must also consider that if you don't consume natural gas, you pay the penalty, okay? As I said before, we are not having big hedges on natural gas because the market doesn't say, in our opinion, present such an opportunity but we are carefully operating our polymer plant at capacity, which is of satisfaction. While when I speak of engineering plastic is the second leg of the business. So not basic polymer commodities, but something which, how can I say, has been additivated or compounded with other materials to modify the characteristics of the polymer, which, as you can easily understand, is bringing a much higher marginality. And this is where, of course, we are focusing our attention and we are seeing, especially in the compounding part, a big growth in comparison with last year and this is a consequence of, say, a stable organization that we have been able to build. Remember that this is a new business line since, let's say, the September, October of last year. So we are very confident that this business line during the coming years would bring us a lot of value and growth.

Next question is from Gianluca Pediconi, MOMentum. We've lost connection. Next question is from David Storms, Stonegate.

Just 3 from my side. I wanted to start -- could you elaborate a little bit more on maybe any of the indirect consequences from tariffs that you're keeping an eye on aside from maybe some demand and volume pull forward? That's number one. With the rise in average selling prices in the North America BCF segment, what gives you the confidence or the ability to push those prices and could they continue to rise throughout the year? And you mentioned on the call that EMEA and Asia are in line with your forecast. Is there anything that could speed them up and bring those regions ahead of forecast?

Well, unfortunately, just like many others, we don't know actually what the indirect consequences are going to be. Strangely, what we were imagining has not happened, but exactly the opposite happened. So we were eventually expecting some slowdown of demand for automotive yarns in particular, in the United States. And on the contrary, we were expecting an increase in textile yarn in the North American market. And let me say, fortunately, it happened the opposite. Of course, fortunately, because the automotive and BCF market in North America, size-wise, is far bigger than the textile one. Of course, we would have preferred to have no problems. But I mean, if you have to have them, better to have on the smaller part of your businesses. I believe that nobody knows what is happening right now. Still, we have a period of 90 days, which in the case of Europe, is what at 50%. In the case of China, it has now started, even though we still don't understand what is the actual import duties that Chinese goods will have to pay or be paid when imported in United States. We don't know the rules. We don't know how to apply them. So everything is very, very uncertain. Also, we don't know whether Chinese people are now saying, okay, we have just 90 days, better to ship whatever we can. And then let's see what is going to happen afterwards, in case we find an agreement. We keep the settlement at the same amount or will be higher or possibly lower. So it is very, very difficult to understand. Also, we have seen a positive trend of sales of cars in the United States. And I believe that the only explanation is that the final consumers were afraid of possible price increases so when they could anticipate to buy, they did. But clearly, they will not buy twice, they buy once, and then they will expect that the new car will become old and it will get the new time for buying a second car. So we are, of course, at the window, waiting and understanding what might happen. Price-wise, as always, Aquafil has always been able to demonstrate that we are able to, let's say, maintain our margins and eventually pass through price increases or inflation to the market. This is, of course, still part of our confidence and we will wait whether, of course, this will be necessary in the future in case tariffs should impact somehow our system, even if for time being as I said, that impact are not existing. And theoretically, the so-called duty drawback system in United States should remain in place. So we should have no tariff impact as of today, we have no, let's say, any kind of news that might bring any kind of new tariff of import duties on top of what we already, of course, have. EMEA and Asia, clearly, there are again, a lot of uncertainties because yes, in EMEA, as you know, we have enjoyed the exit of 1 competitor, which has given us a little bit of orders that were included in our business plan. Asia, we are seeing -- for us Asia means from China, Japan, Southeast Asia and Australia and New Zealand. I must say that the last weeks in Australia and New Zealand have been weak and the explanation of the customers has been because of general elections in Australia, they have finished. In New Zealand, they should take place shortly. And they say normally after that general demand should, let's say, grow and return to, say, a healthier level. In China, what we are seeing is a slowdown of the automotive market, okay, both for the domestic consumption and for the export. But again, the visibility is quite low and poor. Japan is still giving us a lot of, let's say, growth, which is partially compensating the weaknesses of the other final market. How to speed up the process? Of course, keeping our organization as lean as possible, keeping an eye on our cost and I promise you that we will do it and very likely during the coming quarters, we will give you also some updates on that, of course, keeping innovative. And this is the only thing that we can do, which is part of Aquafil DNA.

The next question is from Niccolò Beretta Zanoni, Banca Akros.

I have just a follow-up on CapEx. So just to be clear, do you confirm the level expected in the business plan or you consider the possibility to reduce them for this year?

Well, for this year, for sure, well, in fact, already during the last presentation and the last communication with the market. We have always said, please be careful that when you make a business plan, you give some numbers that are, of course, a guidance. But then when you launch an investment in our industry, I mean you don't get stuff out of the shelf. But very often, you have to ask for very custom-made equipment that they have, they may have a longer or shorter delivery time, okay? So it is normal that when we give a number, then there is, how can I say, part of the actual payments that are going to the following year. So we said already last year, and in fact, we have given a range because, of course, you don't know 2 years before or 18 months before how much of what you want to invest. In fact, it's going to be paid instead of before the 31st of December, I don't know, during the first quarter of the following year, okay? On top of that, as I said before, certain investments that are not, how can I say, so let's say, short in terms of payback have been, how I can say, I don't want to say put on hold, but we are waiting a bit to launch the orders until we understand whether the market is stabilizing, is rising or is decreasing. And this has given us the possibility of studying this, let's say, other things that we have not considered before of this, say, newer technology that are quite interesting for reducing the energy consumption in our chemical part. And you know that for the chemical production, the energy is after the raw material, very likely the most important cost factor that you have to consider. So who knows, maybe better to wait 2 or 3 months more, understanding whether these new technologies are applicable to our system. At this point, understanding also when the equipment that has to be custom made are going to be available for our, let's say, installation. And then, of course, possibly, they should bring even a higher return than the other ones. And then you postpone. In particular, the automation part that was, I mean, not irrelevant because in our business plan, the first investment was the Chinese one, which is, let's say, on the road. The equipment is already installed and has started to operate. The new building still waiting for some permissions, but it should come before the end of the year, paid partly before the end of the year and partly because of course, if they deliver the last part in December, it will be paid in 2026, okay? The second important investment was on automation, in particular, for the Italian plant. This is the investment that has been slowed down a little bit to understand whether, I mean, the market is responding to our business plan. And maybe it will be in ballot with the possible, hopefully, energy saving part that could delay the automation one.

The next question is from Gianluca Pediconi, MOMentum.

I have a few questions. The first one, Giulio, you mentioned the pricing power of Aquafil, which would be able to pass on to consumer if there are any tariff. But the higher energy costs, there were EUR 1 million that you mentioned in the first quarter. Will you be eventually able to pass on to your customers if price -- the cost -- the energy costs are not going down? That is the very first question. And related to today, there is any update on the litigation with the Slovenia suppliers that you can share with us? And the other question that I have is mostly on another comment that you made that is innovation. And I remember that last time, you mentioned that you were considering scouting entering new markets like the shipping markets, the cruising markets and launching a new product. Is there anything also here that you are in a position to share. And very, very last question on the prebuys that you experience in North America. Are they material, so we should see some negative flow back in the following quarters?

Thank you, Gianluca. Yes, of course, we are confident in case energy prices stay higher than expected, that we are able to pass through price increases. Clearly, we are not a speculative company, but certainly, we want to defend our margins. Given the fact that the number of competitors has decreased, practically, it should be even more certain to pass through any kind of price increase. But I repeat, we will not take a speculative stance. Litigation. I can't give you any, let's say, detail, but of course, we are discussing. As you can imagine, it's a tough discussion. What is most important is that the technical problems are partially solved because this is, of course, the first target to have a plant, which is working reliably. And now we should have a meeting with the third-party management, I believe, in a couple of weeks or so. And during this meeting, unfortunately, this meeting will be with myself, which is good and bad because you have more, let's say, higher path. So either you finally agree as if you have to discuss about tariffs with Mr. Trump, better to discuss first with someone else. And then, of course, once you are close to the agreement eventually going and strike the last shot with Mr. Trump, I'm joking, of course. But clearly, we are at the highest possible level. So something should come out quickly. And clearly, if something comes out of that, we will communicate to the market. But as I said, most important is that finally, the most critical part of the power plant, I mean, has been running now for 2 months without any interruption, which is very, very important. Innovation. Yes, of course, we are continuing our process to try to bring new products into the market for our say, historical applications, but also for new applications like transportation, circular products like circular fishing nets or technical ropes or also now area rugs is another area of great interest. And I mean, if I hear my people, they are very excited. I prefer to hear excitement from my CFO, as you can easily understand because, of course, he sees that the new products or the innovative products are bringing results that are in line or even possibly in the long term better than our expectation. Prebuying U.S.A., currently, we are still seeing solid trend of order entry for our carpet yarn business in the United States, not crazily high as we have experienced during, let's say, the second part of February and March, in particular, but still, let's say, pretty strong, solid and still slightly higher than our budget forecast. Hopefully, it will stay like that. But we have no...

Sorry, Giulio, why do you think they are prebuys? Because I spoke with other companies, non-Italia. They said that probably there were not so many prebuys in the U.S., at least much less than expected before the so-called The Liberation Day. Do you share this view? Or do you have some intelligence for which you believe that actually they were buy some front-loading orders?

I don't know about the other, but I can comment about ourselves. And when you have orders that are 100% higher than normal, certainly I don't see...

Something we have, okay. I understand.

Sales of cars that are double than normal. So that's why we're saying, for sure, someone has built up some stock. And clearly, this might impact the demand during the course of the year. On the other side, we are confident to eventually substituting this lower demand with the substitution of the competitor that exited the market last December, January, which we are not seeing yet the orders in large quantities. So that's why we are still remaining confident to keep a very high operation rate in U.S. And we are even thinking and we still have some small, small possibilities of making some investment substituting some older equipment with some newer one, which, of course, has higher productivity, but I'm speaking about very little stuff, like $1 million or so. But we are, of course, starting and understanding what will be the trend during the next period. But certainly, it can be twice the order of normal. So evidently someone has given the order to the value chain to build up some stock to avoid any, how can I say, interruption or possibly avoiding to absorb or postponing to absorb price increases, better to not put material on stock rather than paying it, I don't know, 5% or 10% more later.

No, no, very clear. It makes sense. I have just a follow-up question, if I may. It's on the freight rates and the possible opening of the Swiss channel, the Red Sea. That will be -- could you have any positive impact for you or it's immaterial?

Can be positive or negative.

Can be also negative?

Can be also negative. Because one of the threats that we are seeing for the future here in Europe is Chinese operators, Chinese companies rerouting exports from U.S.A. to other geographical areas. So if, of course, they don't have possibilities or they decided to reorientate part of the trade instead of the U.S. to elsewhere, I mean, the second or the first largest market in the world, certainly is not Uruguay, it's not Ghana, it's not DRC, it's certainly Europe. So the reopening of the Red Sea, let's say, route is, of course, good because in case we decided to buy raw materials, we could get it quicker and less expensive, okay? But on the other side, we could also see some, say, commodities coming into Europe, which could further affect the profitability and the operation of our suppliers. So we are not so much afraid of direct impact because this might be, in particular, on the polymer side. But of course, if Chinese that are having a capacity that is 10x or 8x bigger than the European ones they start sending a lot of stuff here into Europe, we might see some other supplier going out of business. And this is good or bad? Again, it's a matter of depending whether you find to substitute them. Certainly, you can buy from Asia cheaper, but this is having an impact on your net working capital because, of course, you will have to have a material in transit for, I don't know, 6 to 8 weeks and material on stock for another month or 2. But then, of course, prices should be lower. So we will see. It's a complicated picture that is very difficult now to say whether it is good or bad. Let's say that today, shipping costs have decreased. They're now -- I don't want to say back to normal, not for all the destinations, but for some destinations, they are quite low. For others, let's say, in line with the historical prices and for other still a bit higher. Overall, I would say we are not damaged presently by transportation costs when we speak about shipping overseas. I'm sorry that sometimes I have to give some explanations. But at the end, it's difficult for me to tell you it's good or bad and it is bringing X or Z. It is very, very difficult.

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

Thank you very much.

Thank you all. Thank you for attending our first quarter financial results, and I hope to see you soon.

Thank you.

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