Good afternoon. This is the call school conference operator. Welcome, and thank you for joining the Aquafil First Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Karim Tonelli, Investor Relator of Aquafil. Please go ahead, sir.
Thank you operator, and good evening to all, and thank you to join us for the Aquafil conference call on First Quarter 2023 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 statement. For a discussion of these risks and uncertainties, you should review the disclaimer in the presentation we issue today. Say that, allow me to leave the floor to Mr. Giulio Bonazzi for his remarks.
Thank you, Karim, and good evening, and thank you again for attending our conference call. The First Quarter has substantially confirmed our expectations for the first part of the financial year 2023 in terms of margins. These results were determined by different dynamics of the main geographical areas where the group is present, as well as by the unit value of raw material stocks. Sales of regenerated ECONYL brand products continue to grow, reaching almost 47% of the group's fiber turnover. The startup of new engineering plastic production plant is now complete, and we have started to serve this new market, which we expect will provide an important element of growth and portfolio diversification in the coming years. The group continues its research and development activities with the aim of improving and expanding the product offering, as well as their production in a more efficient manner.
We confirm that the year 2023 will still be strongly characterized by uncertainty and high volatility, especially due to the performance of the end markets in European and Middle East and Africa, which allow for extremely limited visibility. In this complex and articulated scenario, attention to cost management remains high and focused on the maximum rationalization, and the group remains committed to the continuous development of innovative and increasingly sustainable solutions to improve the competitiveness and quality of the products sold.
Now, we are ready for the Q&A session and for me.
Okay. Thank you. This is the conference operator. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Carlo Maritano with Intermonte. Please go ahead.
Good evening, everyone. I have some questions. The first one is on the current trading. If you could provide us any update on the trend you witnessed in April, in the first weeks of May, if there's any change in the trends compared to the first quarter. The second one is on China. Are you seeing any improvement from the reopening or it's too early to see any kind of improvement? The third one is on India. Is there any update on the acquisition in India or you confirm what you said recently in March? Thank you.
I start from the third question, which is, of course, the easiest. We are working on it. We will see when it is the proper moment to finalize it, of course, if and when the negotiations with the local partner arrive to a point of satisfaction. Talking about the current trading, we confirm that unfortunately, especially in the European market, we are seeing a slow demand. Of course, we have been through typical slow momentum driven by Easter, in Italy, also by the 25th of April, which is normally giving long shutdown of our customers in case of slow market demand, as well as May in Central European countries, where there are several, let's say, festivities that are normally reflected in a slow period of the year.
With regard to Asia Pacific and North America, the dynamics are different, especially the one of North American market, and they seem to continue on a good trend as they did last year. Plus or minus. China. Well, let's remember that our Chinese plant is not serving only the Chinese market. On the contrary, the Chinese market is representing the minority of the goods sold from that plant. That plant is serving a part, our operations that we manage directly, like the one in Thailand, or that we manage through a local partner like the one in Japan, we service mainly the market of Oceania, so Australia and New Zealand.
With regard to the Chinese market, it is mostly coming from the automotive market, which seems to ramp up and where we are having a lot of new opportunities with regard to the EV vehicles that are very much strong in China.
Thank you.
The next question is from Gianluca Pediconi with MOMentum. Please go ahead.
Giulio, I have a couple of questions. The first one is about seasonality in profitability. In Q1, you reported an adjusted EBITDA margin, which was what? 12.9%, if I'm not wrong. Compared to Q4, which was something in the range of 12%, there is an improvement. What I would like to understand if makes sense to look at the profitability trend quarter- by- quarter, or because of the seasonality, we should only look year- on- year. First quarter 2023 versus first quarter 2022. That is the first question. The second question is, a couple of months ago, when you reported the full year results. In the press release, there was a statement that you are looking forward to the next year with optimism. What I wanted to understand is if this lack of visibility, mostly in Europe, is something which is materializing over the last couple of months.
Compared to your view, again, when you reported the full year results, now there is a deterioration in the business. Thank you.
Well, yes. I think that makes much more sense to look quarter- by- quarter, but financial year with financial year. First quarter 2022 with first quarter 2023. Clearly, during the last 18 months, we have gone through very special momentum that have driven very big changes in terms of stock evaluation, because of energy prices, because of raw material prices, and because of selling prices. There will be, as we have already announced, during our last conversation, how can I say? Kind of adjustment during 2023, as there was an adjustment in 2022. Which in 2022 went upward because of all the cost and inflationary pressures. In 2023, on the contrary, given the return of the energy market to prices that are, let's say, more normal, if not yet a return to the ones pre-COVID, or let's say, to the situation of the years pre-COVID.
The raw materials are also descending, driven by low crude oil prices and low energy prices, and also low transport costs that are putting pressure for commodities coming from other markets, which last year it was almost impossible to receive. There was a kind of natural protection around the European market because of this transport situation that was really creating a big problem. These are, of course, factors that we will have to consider, especially during the first semester of this year, until this adjustment will, if not be completed entirely, but they will have shown almost the biggest part, at least, of the effect. The optimism is still there, but when we gave that opinion, it was more related on a medium, long term basis. We spoke about the approval by the board of directors of the three year plan, and this is clearly still valid.
On the other side, they were already, and we are confirming, that especially during the second quarter, we are seeing, especially in Europe, a slowdown of the market demand, which was expected by our budget forecast. Now we must understand how long and how big this slowdown will be.
Giulio, if I may ask, this slowdown in Europe, to which market is it referring mostly? Automotive? Construction?
No. Automotive market, at least for the time being, is holding at, let's say, a relatively healthy level. In our case, especially thanks to ECONYL. We are seeing a slowdown in all the other areas, that can be polymer, especially the base polymer business, which is more a commodity. We are seeing a slowdown in the nylon textile filament, the NTF, as well as in the contract market for the BCF application. It's more a general slowdown. Our assumption is that there is, of course, an effect of the higher interest rates, lack of trust, and destocking activities that are going on by the customers, just like we are, let's say, implementing strongly during the first period of this year.
Sir, very last clarification. When you mentioned that profitability was affected by raw material stocks, energy price, I didn't catch it. Are you implicitly meaning that the second half there will be an easier comparison? Or that was your message? When you were restoring.
I'm saying that last year, we have gone through a round of price increases of all the cost factors that have got a big influence on our stock evaluations. This is because of, let's say, how you have to account your numbers. Clearly, if you buy raw material cheaper, if you buy energy cheaper, and you readjust your prices according to the lower cost factor, you have also to implement an adjustment of your stock evaluation. Which is, in reality, not impacting the real, let's say, profitability of the company. Last year, if you remember, we also said, maybe we should look at 2022 and 2023 all together because of these, let's say, unprecedented variations. This is exactly what we are experiencing these days.
Thank you.
The next question is from Dave Storms with Stonegate Capital Partners. Please go ahead.
Hello, everyone. Just wondering if we could start with your current debt levels. They've kind of held steady around that, call it, 2.7 x. Is there any interest in paying that down, and how do you see your capital allocation priorities?
Well, sorry, because the voice was not coming clear. Are you speaking about the ratio between EBITDA and net financial position?
Yes, correct.
Yes. It's holding at that level. If you look at 2022 first quarter net financial position, if you go back one year, you see that it went up, let's say, in an important manner. This year, it stayed more or less stable because we are working, as we announced last year, on containment of our net financial position. How? Of course, reducing our stock level, which is also partly impacting our profitability, because clearly, if you produce less and you sell more, the marginality and the unit cost factor are touched by this factor. This is quite normal, and you have to do it very fast, especially when the movements are so important as we are experiencing now. You cannot wait too long, because if not, you impact your marginality even more.
Very helpful. Thank you. One more, if I could. You saw strong volume growth in the Americas. How much runway do you see left in that geographic segment?
That's a good question. Clearly, as you remember for sure, we took profit of the exit of INVISTA as a fiber supplier. Now in U.S., there aren't many more left in terms of carpet yarn producers. Independent, because of course, there are integrated carpet yarn manufacturers that are playing a different ballgame. In terms of independent fiber manufacturer, you have Aquafil, you have Universal Fiber Systems, and you have still a little bit of us, and which is still having a small production with, let's say, not very up-to-date equipment and operation. We imagine that during the next couple of years, there could be some other adjustment, but clearly the room is narrowing. We will have to work hard in terms of product innovation, circularity, and introducing maybe also some, let's say, applications that are close to the ones that we are working now.
Like, for example, transportation, not only automotive, but cruise, airplanes, trains. There are a lot of, let's say, still possibilities that you can go to touch niches that are not yet served by us.
Understood. Thank you very much.
Welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Once again, if you wish to ask a question, please press star and one on your telephone. The next question is a follow-up by Gianluca Pediconi with MOMentum. Please go ahead.
Hi, Giulio. Sorry, I have a quicker follow-up question. ECONYL, in Q1, was ECONYL the brand or the product, up 11%. In terms of price mix, you both increased the price and the mix year-on-year, but profitability was affected. The reason is mostly due to the negative operating leverage or also play the role the way you calculated the cost of raw material?
If you look at the difference between our, let's say, forecast and the actual result, there are a couple of factors that we have to take into account. One that we didn't disclose, that we should have maybe normalized, because it is a bit we have to explain. We have got an accident by one of our operation in the U.S. that was due by a homeless that entered into an electrical cabin and light up a fire. Okay? It was in our carpet recycling facility in Phoenix, reduced operation for the entire quarter. Okay? Because in terms of prudence, we didn't account or register any, let's say, special compensation.
Compensation.
We are waiting for the final count by our insurance company. This is something that, if you look at cost amount, could be more than $1 million during the quarter. The second factor is how much you buy in terms of raw material and the kind of raw material that you're using on stock. If you are using raw material on stock that are being purchased at a higher price, and you buy, I don't know, I'm giving numbers just to explain the problem. You sell 4,000 tons, and you buy 2,000 tons. The 4,000 tons are made of 2,000 tons with fresh raw material and 2,000 tons with old raw material. Clearly, your costs are based on 2,000 tons of old raw material, but the final evaluation of your stock is coming from the new fresh raw material, if I explain myself correctly.
This is impacting in terms of practical devaluation of stock. It is not a loss of margin in terms of we reduce prices more than raw material. This is not what is happening. It's maybe happening, not in a large scale, but is happening exactly the opposite effect.
Thank you. Very clear.
One very last reminder. If you wish to ask questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
Thank you very much to all for joining this conference call, and see you at the next.
Thank you. Good evening.
Good evening to all.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones. Thank you.