Vidrala, S.A. (VID) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and welcome to the conference call organized by Vidrala to present its 2022 results. Vidrala will be represented in this meeting by Raul Gomez, CFO; and Inigo Mendieta, Head of IR. The presentation will be held in English. In the Q&A session, questions will be also answered in Spanish. Nevertheless, it is strongly recommended to post questions in English in order to facilitate understanding of everyone. In the company website, www.vidrala.com, you will find available a presentation that will be used as a supporting material to cover this call as well as a link to access the webcast. Mr. Mendieta, you may now have the floor.

Okay. Good morning to everyone, and thank you for the time that you dedicate to attend this call. As announced, Vidrala has published this morning its 2022 full-year results. And additionally, we have also published the results presentation that will be used as supporting material to this conference call. Following this document, we will dedicate the first part of our exposition to briefly explain the figures released today to devote afterwards as much time as necessary to discuss on the business performance in the Q&A session. We invite you to access the webcast through the link available in our website. So starting with the main magnitudes, in the full-year 2022, we achieved as most relevant business figures, revenues above EUR 1.3 billion and EBITDA of EUR 270 million and a net income equivalent to an EPS of EUR 4.97. Net debt at the end of the year stood at EUR 167 million, which is equivalent to a leverage ratio of 0.6x the reported EBITDA. Turning to Slide 4. We look at the top line performance, analyzing the annual variation of revenue broken down by concepts to arrive at the reported figure of EUR 1,345 million. As it is shown in the graph, this figure is the result of an organic growth of 23.9%, incorporating the effect of the currency, the reported variation amounts to 24.1%. Following the order of key business figures referred to at the beginning, we analyze with exactly the same breakdown, the variation of operating income. 2022 full-year EBITDA amounted to EUR 270.4 million, reflecting an organic growth of 1.1%. And in reported terms, EBITDA increased by 1.0% in the period. These operating figures resulted in an operating margin, EBITDA over sales of 20.1%, which represents a contraction of approximately 460 basis points compared to 24.7% registered in the previous year and as a consequence of unprecedented inflationary pressures in glass manufacturing costs. If we take a detailed look at the performance by semesters, we can see the benefits of internal energy cost mitigation actions and sustained solid manufacturing performance, the first effects of our investment plan and a progressive adaptation of our sales price. Going down through the income segment, net profit obtained in the year 2022 amounted to EUR 153.7 million equivalent, as mentioned before, to EUR 4.97 per share, which reflects an increase of 6.9% over the previous year. And finally, net debt at the end of the reported period closed at EUR 167.2 million, a figure that is a consequence of a cash generation that was affected by exceptional working capital movements, which was already anticipated, our full commitment to shareholder remuneration and increased efforts regarding share buyback programs. As a result, the leverage ratio as seen in this slide, stands at 0.6x EBITDA. And now before turning to the Q&A session, I pass the word to Raul so that he can extract the main conclusions or highlights and make additional comments that he considers appropriate.

Thanks, Inigo, and thank you all for your time attending this call today. Well, as a brief conclusion, the year 2022 soon turned out to be quite a complex year for our business. Distorted by the abnormal cost inflationary pressures, mostly in our case, concentrated on the energy factor due to the events seen between Russia and Ukraine. This unusual context in 2022 caused collateral inflationary implications and temporarily distorted significantly our margins and impacted our cash profile. That was particularly evident during the first and the third quarters of the year in coincidence with the worst conditions in the energy markets. Progressively, along the year, our internal actions, as Inigo said before, to better manage our cost, our sustained solid operational performance, the benefits from our long-term investment plan and the gradual adaptation of our sales prices helped us recover margins and finally, even exceed our most recent guidance. All in, we will consider that our margins today are consolidated at levels more or less consistent with our historical records, slightly above 25% and should remain safe at this level for the starting of the year 2023. In any case, beneath this is particularly volatile year, particularly volatile profitability conditions lies quite solid underlying fundamentals for our business. Demand for glass packaging is growing globally, supported by strong dynamics linked with consumption habits, premiumization, health, sustainability and demographics. That means that the consumers worldwide are increasingly choosing glass as a packaging material and food and beverages global brand owners motivate us to invest, serve and follow them appropriately. In my conclusion, glass has a bright future. Consistent with these dynamics, we are preparing ourselves for the future. We are trying to make our business profile evolve, boosting our cost, our competitive differentiation, growing, expanding our range of services and diversifying our geographical activity. As an evidence of this, since the end of January, as you may be aware of, our subsidiary in the U.K. Encirc is the owner of the quality filling facilities and the logistics infrastructure in Bristol, known as The Park that has been acquired to the great wonderful global producer -- global wine producer, Accolade Wines, a company owned by Carlyle. The business rationale behind this deal is, in my opinion, quite illustrative to understand our strategic approach. The integration of this business is an example of pure verticalization that improves logistics, the risk operations, minimizes carbon footprint, helps our customers grow, reinforces and seek some parallel approach, business approach, secures long-term sales and finally, makes us even more different. Moreover, probably more strategically relevant for us, 2 weeks ago, Vidrala announced the acquisition of a minority stake in the Brazilian company, Vidroporto. And this really represents a relevant step for us. An example of a very deliberate strategic action. Brazil is a fast-growing market for the glass packaging industry, a target region for growth, investments and expansion for most of the global beverage brands. And Vidroporto is a well-known company for us, a renowned, highly competitive player in this interesting region. We are there with a long-term perspective to help support its legacy, Vidroporto's legacy and secure its future as they need and our long-term credited industrial intentions. It is not by coincidence, in my opinion, that all stakeholders from shareholders to customers, management, employees, suppliers, banks, government, administrations welcome us in our entry in Vidroporto's share capital. Thank you.

Okay. This completes our exposition. We now give way to the Q&A session.

[Operator Instructions] The first question comes from Jose Antonio Suarez from CaixaBank BPI.

Regarding the results, I want to clarify if you could bring us, for example, the weight of energy and cash cost that has been in 2022? Also if you could [indiscernible] is the level of the inflation in cash costs, excluding energy, you are expecting for 2023 and also the level of CapEx over sales for the coming years? And also a question regarding margins. We want to know a little bit the rationale, what has changed because of your previous guidance you have over-exceeded and what would -- should we expect for 2023 given the levels of [indiscernible] prices, if we could at these levels, even if it doesn't stay low with an achieved levels [indiscernible] with a 55 level -- 55 numbers we have right now, it could even reach the levels around 30% [indiscernible]. So could this be achievable? Could you explain, give us some visibility about these numbers, a little bit the rationale of what could we expect from the 2023?

Let me start with your comments regarding inflation. Well, let's say that under the current conditions, despite the energy factories today more relaxed than a year ago because a year ago, energy inflation was really, really abnormal. Energy is still pretty expensive for us under a historical perspective, get more than 3x higher than historical levels. I refer to the prices -- market prices for natural gas or electricity. And more important, above the energy factor, inflation is unfortunately consolidated all across the industry. I will say all along the economy in many other cost inputs from salaries to raw materials to services, we, unfortunately, are still seeing inflation everywhere in the business. And we are not yet seeing any real shift on deflation as we need, okay. So having said that, we are still seeing inflation excluding energy of double-digit sustained in 2023, okay. And that will be the first argument for us to maintain our pricing dynamics, okay. Having said that, going to another of your question regarding our margins and the visibility of our margins, okay. Let me please first say that our margins during the last quarter of the year that I understand has been somewhat surprising, reflects some nonrecurring benefits in our energy cost derived from internal actions, the switch from gas to diesel in some of our sites and some other internal efficiencies that help us extraordinarily capture energy cost below market levels in the last quarter of the year, okay. Considering cost at market prices, as we consider as more representative of no market businesses, let's say that our recurring normal margins in the quarter, in the last quarter of 2023, are about -- around 25% EBITDA over sales. And this is our starting point in 2023, and this is until we give you further details of our guidance in April in the first and the best reference for our margins in 2023. We do consider safe these level of margins, no less, no more.

And finally, [indiscernible] in terms of CapEx, we're expecting for this year 2023 CapEx in the range of EUR 140 million to EUR 150 million, okay, which is related to the project in Portugal that we are currently executing as was already anticipated and the rest of concentration of CapEx maintenance, nothing especially extraordinary in this year 2023.

Sorry, regarding the weight of energy cost in 2022. And if I can do a follow-up. So the 25% margin you're saying to maintain, given that even without the one-off cost that it would be around 25%, you have implemented a 15% to 20% price increase for the year, but also prices of gas has fallen like [indiscernible] gas. I think right now, it's around EUR 55 megawatt and it was like EUR 78 or something like that in the fourth quarter. So you should also implement -- this improvement despite you have a 10% level of inflation should at least improve the margin. So I'm trying to wonder, even with a 10% inflation increase in other cost, shouldn't at least we expect a little bit better in the margins? Because energy levels are like much lower, you're implementing price increases. So even with the spread increases, lowering margin and lowering prices in gas, we should expect the 25% you're saying to -- for the upcoming year?

Yes, you're right. Let me clarify a little bit on this. Okay. Let's consider that energy accounts for approximately 1/3 of our operational OpEx cost structure. This 1/3 is, let's say, the energy prices are double in comparison with 2-years ago prices, that is, let's say, between 40%, 50% below 2022 levels, okay. But the remainder of our cost structure, 2/3 of our cost structure is comprised by different factors where we are still seeing quite high inflationary pressures of double digits. So the mathematical combination of this will give you a result of still, unfortunately, positive inflation in 2023, okay. We won't see a real deflation in 2023, not yet, okay. The good thing is that our inflation in 2023 will be quite more realized than in 2022. Having said that, and understanding how this explains our pricing initiatives, let's say that in the industry, the price environment remains quite constructive. And our initiatives are successfully helping us recover last year inflation. And let me remind that in the year 2022, we suffered very significant margin deteriorations because of inflation, not pass through prices. Okay. These conditions, these pricing dynamics will remain safe, at least over the next 2 quarters, following the price review dynamics typical in this industry that normally capture cost -- past cost conditions, okay. Looking beyond summer or looking to 2024, prices will unavoidably and progressively reflect underlying our real cost conditions, whatever they are. But please let me remind that there is still a lot of inflationary pressures above the energy factor. Having said that…

If I could follow-up from Capex from EUR 140 million, EUR 150 million, how much will be recurring CapEx, just to clarify, for 2023, if you won't mind?

This is mainly everything to recurring CapEx, excluding between EUR 20 million to EUR 25 million, Jose Antonio, that would be mainly related to sustainability.

The next question comes from Fraser Donlon from Berenberg.

Just on pricing, I guess, how do you assess the outlook for 2023 being that maybe some of your competitors could have hedged energy at higher prices? And are you kind of benefit from that? So do you kind of feel that you're particularly competitive and that maybe you could have more, let's say, upside optionality on pricing than we ever might anticipate? And then the second question was just on, I would say, capacity additions in the industry. I'd be super interested to hear your kind of assessment of capacity expansion in the next, I would say, 2, 3 years. So looking to the end of 2025 and how you see that traveling relative to the lack of supply of containers, which is in the market today?

Okay. Thank you very much, Fraser. Well, let's say that the demand across the industry remains pretty stable, okay. Unavoidably less buoyant than a year ago, but nothing really relevant. And the main driver for our sales volume performance, probably this is a reference to be applied for the rest of the industry. It still is our tight inventory levels in a competitive landscape that I will say, remains broadly supply driven. Having said that, despite we are starting production in our new farms in Portugal as expected, the maximum realistic volume we can -- and we won't capture in 2023 is, let's say, no more than 1% of volumes growth in 2023. So we could also say that we are very, very clear and strategically quite protected against potential competitive pressures, capacity additions or potential demand relaxation. And this is deliberate. This is very deliberate. Our business targets, let me remind these are based on cost competitiveness and industrial footprint realignment to selectively invest and divest in some of our facilities, energy transition and result margins. Regarding prices, we have effectively started the year with price increases of double-digit on a year-on-year variation as anticipated back in our October call. And this is, in some cases, the result of the comparison base as our prices in 2022 were progressively adopted in several different steps. Over the year 2023, as this base effect progressively disappears and our annual price variation will be less evident and will also capture underlying cost conditions if they tend to be more relaxed as we need, okay. Having said that, let's say that we feel confident in our ability to finally reflect a double-digit increase in prices for the full-year 2023, okay. No more, no less, but this double-digit is still a good reference for our expectations.

The next question comes from the line of Michele Filippig from Jefferies.

I have 2. The first one is on energy. And my question is that now that the risk of energy shortages is quite marginal and energy cost corrected from 2022 picks, what's the plan in terms of keeping the switch from gas to diesel? And can you remind us what's your growth rough hedging level for energy into 2023? And the second question is on the Vidroporto acquisition. Do you have by any sense, any time estimate by when the legal disputes involve in the family ownership might be resolved to make clear when you'll probably can integrate the full business into the group?

Hello, Michele, thank you for your questions. So regarding hedging, as we've published in the business section of our management report, we are today at hedging levels around 55% for the year 2023 and 13% for the year 2024, okay. And on top of that, please understand that around 1/3 of our contracts with customers are linked to price adjustment formula that should also give us some level of protection. And in some regions, we still have some government measures to protect or to mitigate the elevated energy cost inflation, okay, at the level, say, in terms of hedging, the ones that I have just mentioned. And just to complete this, let's say that current market levels on natural gas prices levels that we are progressively fixing in our hedging initiatives should eliminate the likeliness or the opportunity to switch again from natural gas into alternative energy sources like this natural gas oil or fuel oil, okay. And this is what we want to happen, okay. Your second questions regarding our story in Brazil in Vidroporto, well, let's say that -- well, let me say that we are very comfortable with our very conscious position as a minority shareholder. And we are prepared to remain in this position that I needed, whatever it takes. We do have very clear and transferring intentions to acquire the remaining 70% and become the sole shareholder of Vidroporto. And we do believe that this is our partners what they want, shareholders, management, customers, as I said before. But we understand that this transaction is not yet possible because the holding company that owns the major shareholding of Vidroporto is under some legal restrictions to sell this holding company with a third party. And we will wait the time that is needed to complete this transaction once this situation is clarified. When or how long will it take? We don't know and we can't control. It maybe take months or weeks. And this is okay for us. And we are a very long-term industrial partner and our entry into Brazil is part of a long-term delivery strategy, okay. So let's be patient, please.

Just if I may, one follow-up on the first question. The other levers like the governmental support in terms of energy costs, are they included in that 55% hedging level that you mentioned? And sorry, if it was not clear to me, but like are you currently still 20% on diesel or like did you go back on gas because that is one like was part also of my question? If you're still keeping the diesel like you mentioned like 20%…

Yes, got you. Just to clarify, we are full back using natural gas. And so we are full back in natural -- in our natural normal consumption habits. So this is good news, and this is because there is no more an opportunity to switch between natural gas and diesel, and this is because we have started to see some relaxations, stabilization in natural gas markets in Europe, okay. The level under which we are protected, the level under which we have fixed prices to this 55% of hedging levels that Inigo mentioned before are not significantly different to the market levels that you can see today. So we are pretty comfortable with our level of protection, with our hedging levels and with our level of competitiveness in that sense.

Ladies and gentlemen, there are no further questions over the phone. Dear speakers, back to you.

Thank you, Olivia. So there are no further questions by telephone. We are taking a look at the questions received via webcast. We believe we have answered all of them, but just to make a quick summary, okay. As for hedging structure for 2023 and 2024. As mentioned before, we have hedged at levels of 55% for 2023 and 13% for 2024, okay. Also in terms of expected sales growth for 2023, theoretically, our top line performance in 2023 should be driven by prices. We are saying that we see prices, as of today, above the double-digit in the new scenario. And in terms of volumes, as mentioned before by Raul, we expect volumes to be flat to slightly positive in 2023, mainly driven by supply conditions more than demand conditions, okay. And I think with this, we should have answered also all the questions received via webcast. So once again, thank you for the time that you dedicate to us and just remind you that we remain at your complete disposal for any further questions that may arise. Thank you very much.

Thank you very much.

[Foreign Language] Ladies and gentlemen, thank you for your participation. You may now disconnect your lines.