Good afternoon and welcome to the investor and analyst conference call regarding 2023 results, 2024 budget, and some more insights about the recently made acquisitions. I would like to suggest that we start with a short break in order to give a chance to other persons to join. We'll start in, let's say, five minutes' time. Thank you very much. Okay, I think we can start. I'm here together with Ioana Birta, the group's CFO, and Alexandra Sica, our IR manager. We will go through the new structure of TeraPlast Group. I will give some details regarding the acquired companies, and then we will briefly have a look at the results of 2023 and the budget. After that, I will hand it over to Ioana to get into more details regarding both the budget and the results.
Okay, we have some significant changes in the group structure following the acquisitions that we made in December and February, respectively, namely Palplast and Freiler Group. So besides TeraPlast, the mother company, TeraPlast Recycling, top five rigid PVC recyclers in Europe. TeraBio Pack, our flexible packaging business, which is joined by Opal, our stretch film brand, starting this year. And TeraGlass, the window and door producer. We also have acquired Palplast, which is one of the two pipe producers in the Republic of Moldova.
And Freiler Group, a group based in Vienna with who owns two factories in Hungary and a series of other companies. There you go. Palplast Moldova, as I said, it's one of the two producers of pipes in Moldova. They produce polyethylene pipes for water, gas, irrigations. And also they sell sewage pipes and telecom protection pipes.
They have an annual production capacity of close to 4,000 tons a year, and they occupy almost 7,000 sq m. For this acquisition that we have done in December and closed in January, we estimate to invest EUR 1 million, which is part of the SPA, throughout this year in order to diversify product range that we manufacture in the Republic of Moldova. And we will also prepare Palplast to be used as a distribution platform for all the products in the group on the Moldovan market in particular and Eastern markets in general.
As you know, Moldova has gained the status of candidate to accession to the European Union, which means that, Moldova will benefit from, pre-accession funds, which if we are to think of how important they were for Romanian infrastructure in water, and, sewage, we hope to see a similar effect in the Republic of Moldova as well. As, in the Republic of Moldova, you have connection rates to sewage, which are, in the single-digit, range in the rural areas. Therefore, we feel strongly about the potential of the market in the Republic of Moldova. And not least in the medium term, we see it as a potential platform to, towards the reconstruction of Ukraine.
Regarding the Freiler Group, Freiler Group comprises of three main companies: The Trading Company, which is headquartered in Austria, in Wiener Neustadt, together with two production companies, both of them located in Hungary.
We are talking about Polytech, which is a pipe producer, also polyethylene pipes, like Palplast, and Pro-Moulding, which is injection products manufacturer, in Hungary. On top of those, also Freiler Group owns 80% of an industrial park located in the W estern part of Hungary. The one location is the gray one on the small map, which is 50,000 sq m of industrial spaces which have all the necessary infrastructure for future developments as industrial spaces. They're, for, let's say, historical reason, their corporate structure is a little bit broader than that, but these are the three main components of the Freiler Group that we plan to utilize and expand by in broadening their product range and by taking advantage of the synergies. We are especially pleased with their geographical footprint. They are exporting all over Europe.
Their exposure to the Hungarian market is extremely limited. Most of their production goes abroad. When I say most of their production, I mean 80%. Plus their geographical positioning gives them access to a cluster of very important markets: Czech Republic, Slovak Republic, Austria, and Southwestern Balkans countries. And of course, Hungary is all within reach from their factories. But in, let's say, a longer run, we are also targeting Germany and other Western European countries with the production realized in Hungary. And last but not least, we are talking about a company that is extremely proficient in the utilization of recycled material, which falls perfectly in line with our strategy to use sustainable solutions in our development. We are a champion in the use of PVC, recycled PVC in our products.
They are a champion in the use of polyethylene in their products. Therefore, we have a perfect match in terms of strategy and orientation towards sustainable development with this strategy. Our colleague, Mr. Laszlo Vajda, the group's development director, is already a co-director in the group, and he's going to help implementing the integration. We are not seeking an aggressive integration. We are going to continue to use their brand because they have an extremely good reputation, and their brand is much closer, let's say, culturally to the especially the German-speaking world.
Therefore, we think that it's a perfect fit in our group strategy and is going to create significant advantages for expanding the geographical footprint of TeraPlast Group. Freiler Group has two locations. Both of them in Western Hungary, one a little bit to the north, one a little bit to the south.
Pro-Moulding is the one to the south. In total, Pro-Moulding and SIP have a total of 83,000 sq m with an injection molding production capacity of over 3,800 tons a year with 83 staff. The second one, Polytech, 64,000 sq m of industrial spaces with over 15,000 tons of extrusion capacity for polyethylene pipes. Right now they are mostly in electric protection pipes, but their technology allows a seamless transition to water and gas pipes, basically with no additional Capex. That's about it on the acquisition part. Regarding the market context, following the last two quarters of 2022, which were underwhelming, especially, due to the high inflation in raw material prices, the first half of 2023 was again underwhelming, and we had some poor results mid-year.
However, in the last two quarters, we managed to take advantage of a much improved market context, especially in engineering works, financed by European money to a large extent through the former European budget and to a lesser extent by the government programs, namely Anghel Saligny, that has provided a boost for the water and sewage infrastructure works in Romania. Therefore, we had a pretty decent couple of quarters at the end of last year.
We, of course, took measures to cut costs in the business lines that underperformed, which is obvious in the average number of staff in 2023 compared to 2022. In the end of the year, we managed to reach results similar to those in 2022 in terms of turnover and EBITDA. However, we did that in a context of much, much lower raw material prices, which were apparent especially in the second quarter.
Also in the window and door segment, we are trying to take advantage of the changing market context where Western Europe tends to perform worse than Eastern Europe, and we are shifting our focus from selling mostly in DIY chains into having a more balanced mix of customers. We are focusing on the internal market where the renovation of all department buildings, due to energy efficiency, to increase energy efficiency, and also new buildings tend to be more, let's say, dynamic than in Western Europe.
Therefore, we are focusing more on the domestic market. As I said, all these trends resulted in results similar to last year. I'd like to point out that, although we had a significant growth in gross margin, which, let's say, increased by 5 percentage points to 37% of sales, this growth has been eroded by the increase in labor cost.
Average salaries have increased in part, and by when I say part, I mean in TeraGlass, due to increase in minimum wage and to a lesser extent, in TeraPlast, but still significant growth considering the inflation rates that we had, and also the increase in energy cost eroded this increase in gross margin. Therefore, an EBITDA margin is only slightly increased versus two years ago. We exceeded 75,000 tons of output last year, and we had a marginal profit, which is mostly due to the increase in depreciation and also in interest rates.
For this year, we see 30% growth, somewhere north of RON 860 million in turnover, which is due half to the consolidation of the businesses that we acquired and the other half to increases that we see in Opal brand, which is this is going to be the first year where we sell the stretch film, and also in the infrastructure market that we hope will have or we budgeted for four good quarters as opposed to two good quarters last year.
We also need to keep in mind that we budgeted to have Freiler Group consolidated only for half a year. Therefore, let's say, consolidation of Freiler Group will keep giving also in 2025 where we will have a consolidation for the full year. EBITDA levels, we plan to increase by 40% to RON 71 million, with a margin of 8.3%.
Margin is still below what we would see as acceptable or as good margins due to the costs of ramping up Opal, and also of making efficient our packaging business are still impacting negatively the EBITDA margin. A net profit of RON 10 million due to increased interest expenses, and a constant gross margin as we don't envisage any brutal shift in raw material prices. We expect a normal seasonality of these prices. Therefore, we don't see or we don't envisage, shifts in the gross margins for this year versus last year. And also in terms of quantities, we will be a little bit north of 100,000 tons for this year, again including our subsidiaries.
I'll give the floor, so to speak, to Ioana, to give you a little bit more details about the results and the budget, and then I will be back for the Q&A.
Hello. We had a slight decrease in turnover in 2023 compared to the prior year. This is due to the effect of decrease in raw material prices. Therefore, we have this 21% decrease in our selling prices. But in exchange, we've sold the more expensive products. We had increases in polyethylene pipes, fittings, and polyethylene is more expensive than the PVC. PVC pipe volumes increased in the last part of the year, but still not enough to reach the volumes of 2022. We had decreases in the volumes of recycled materials and windows and doors, this being part of our strategy to decrease the exposure to retail.
So overall, the decrease in raw material prices as a percentage of turnover was 30%, and this was not fully reflected in the decrease in the sales prices. Therefore, at almost the same volumes as in the prior year, we had only a 5% decrease in turnover. That generated a higher gross margin, gross margin that was enough to compensate for the decrease in the processing costs, for the increase in the processing costs, that is mainly salaries and electricity.
So we end up with an EBITDA similar to the prior year. But profit that was highly impacted by the increasing interest rates and the depreciation of [assets] that we've put in function in the last two years and have not yet reached full capacity. Installations account now for 75% of the group's turnover, a slight increase compared to the prior year.
That is because we had decreases in the other businesses. In installations, we have an increase in turnover and an increase in EBITDA. The increase in turnover was due to the increase in volumes because, as we've said, the prices, the selling prices decreased as a result of the raw material prices. Again, TeraPlast, so meaning the divisions, installations, and compounds, was profitable. We had a comfortable profit margin in installations, and that was offset by the losses in windows and packaging. So for packaging, we've now reached optimal volumes, speaking of the utilization of the production facilities. And moving forward, our focus is going to be on increasing profitability. For the next year, installations, it's going to be the main business. We have an increase on this segment that is due to the M&A.
So from the installations turnover for 2024 of RON 648 million, the M&A accounts for RON 93 million. Therefore, the organic increase in turnover for installations, it's about 7%. That 7%, it's due to increased volumes because we expect an increase in the sales for infrastructure, obviously. We also have an increase in turnover on the packaging segment, and that is entirely due to the stretch film because, as we said, the TeraBio Pack and TeraPack packaging is going to focus not on the increase in volumes, but on the increase in profitability while maintaining volumes.
Still, the packaging segment is budgeted with an operating loss, and that operating loss is due to the stretch film because it's the ramp-up year, and we will be reaching operational break-even here in 2025. The budget follows the traditional business seasonality that we've also seen in the prior years.
From the first quarter, which is also traditionally the best quarter of the group, we've budgeted the integration of the Freiler Group. So overall, the increase in turnover, it's due to the increase in volumes. So we have the additional turnover from the sales of the recently bought subsidiaries and the increase in volumes of our installations business and the stretch film. Generally, the expenses maintain the same percentage in the turnover as in 2023, but we do have in mind some efficiencies, especially at the businesses that generated losses in the prior year. That is windows and packaging. Therefore, we have an increasing EBITDA. The profit is still low because we are talking about a year where we have significant investments, mostly the M&As, and therefore, a leverage that is higher than usual.
But this is going to change in the following years as the newly acquired businesses are going to contribute more to the EBITDA, and the new businesses are going to mature. Therefore, quite a conservative budget because we continue to navigate an environment that has multiple challenges, as in the prior years. But in the prior years, we've constructed our budget on variables that didn't materialize in full, and we had negative deviations from the budget. Now, for 2024, we've changed our approach to budget, and we've been more conservative.
So the leverage is higher than we normally target. So it's going to be four point eight, similar to 2023 next year. And what we target, it's a maximum of three point five financial debt to EBITDA, but this is a temporary situation. It's a temporary situation because EBITDA will naturally increase from the newly acquired businesses and the maturing of the recent investments.
We've paid almost in full at the stretch film factory, and next year we'll collect the subsidy. This subsidy, together with the subsidy on the green energy investments, is going to account for a collection of RON 34 million, which is going to be directed to decreasing of debt. The net working capital is going to stay at about 30% of turnover. That is because we are going to build the stock in the locations of the new acquired subsidiaries in order to obtain the commercial synergies that we're planning for.
So in 2023, we did have significant investments, RON 103 million. That was mostly the stretch film factory, and that was financed from the operating cash flows and some loans. The subsidies refer to investments made in 2022. In 2024, also, we'll finance the M&As and the additional investments in fixed assets through bank loans.
Of course, the operating cash and the subsidies that will be cashed in. The investments in fixed assets refer to the investment in the green energy facility, RON 20 million, and also investments that will enable us to expand our footprint with our other products in the countries of the subsidiaries that just joined the group. Good. We'll look at the questions.
Okay. If you have any questions, please, either by chat or voice.
Hi. This is Iuliana Ciopraga. I have a number of questions, and I think you already have some in the chat. I'm sorry. I should go on, or you want to answer first the ones in the chat?
I will go through the ones in the chat. Just a second. The chat. I stopped the camera due to the internet reception.
Regarding the first question, well, I'm not sure how to see the first one. I would say that TeraPlast, of course, we have our own particular model. We are very focused on sustainable development, e.g., incorporating recycled material in our products, which is not yet for our products, let's say, is not yet law, but it's a trend that will, let's say, soon become mandatory across the European Union, or we think it will become mandatory across the European Union. I think our value proposition is to provide decent- quality products.
When I say decent products, I mean in line with the market demand for fair prices. Because at the end of the day, most of our products would fall under a category that would be called, let's say, commodities. Therefore, here comes the second advantage that we are having.
Our size, which allows us to have decent bargaining power with our suppliers, and therefore to obtain a lower cost basis versus our competitors. Because when you sell commodities, the only way you can be sure of your success is if you have cost leadership. And I think a mix of these two contributes to our recipe. Regarding the headcount turnover, I'm not aware to have industry benchmarks on this one. Our headcount turnover, I think it's in the low 20s.
Most of the positions where we are having turnover are in blue-collar, and especially the entry-level jobs in blue-collar. We have much, much lower turnover in sales or general administrative personnel than in the blue-collar. Of course, we fall under the large trend of Romanian labor market, where we see the main reasons people are leaving TeraPlast Group are to go and work abroad.
The second most important reason, based on our exit interviews, is due to our working schedule, especially in blue-collar jobs. We are working the workday around the clock. Our target is to reach 1,020 shifts per year, which means that we work during the night, we work during the weekends, and sometimes during holidays. But the particularity of our production capacity is this is how we need to run, and this is all the way all our industry runs in order to be efficient.
We did not include too many details regarding the R&D. What I can tell you is that we are targeting on several fronts, so to speak. The current programs by the Ministry of Digitalization and Research, in order to boost our R&D activity, we have invested a lot in our laboratory, in our research center, to have the necessary tools to accelerate our R&D process.
Well, regarding the question of the newly acquired businesses, our strategy is to do what we call a mild integration. Namely, we want to preserve the ethos of those businesses because they are good businesses. We want to keep operating under their brand.
I think my question was not no, but I didn't put the question right. Actually, what I wanted to know is when do you expect they will be consolidated within TeraPlast? I mean, I think of the budget, but I'm not sure when.
Consolidation is budgeted starting from July 1st. So basically, third quarter.
Okay. Okay. Thank you.
We hope to do it sooner, but in the budget, it's third quarter. Regarding the CapEx and the M&A budget for this year, we will present it for the general assembly of April.
But I was wondering, you have RON 53 million included here in the presentation.
I was wondering, I guess that's without M&A, right?
That's the remainders, let's say, of last year, which is accounted to be spent this year. That's without M&A, yes. M&A RON 16.5 million this year for Wolfgang Freiler Group and potential earnout, as detailed in the materials for the general assembly for next year in the cash flow impact. Regarding the 2023 results for the newly acquired businesses, they are not ready because, as I said, we're not planning to do an aggressive integration. However, especially in finance and accounting, they are behind our standards. So we will have, let's say, more work to do that than in operational. We will disclose them in due time whenever they are ready, but we need to take into account that for 2023, there was a high amount of one-off costs related to getting it ready to the acquisition.
We released the 2022 figures for the Wolfgang Freiler Group, which we feel that they are more appropriate to measure the business's performance rather than the 2023 with the one-offs. We see efficiency. We see improvement in the new businesses. We need to increase the utilization of injection capacity. We need to increase the utilization of pipe capacity. We have some ideas. We have some, I would say, strong ideas on how to do that because we feel that there are areas where, although they had everything they needed in order to increase these utilization rates, they did not do enough.
They focused a lot on cable protection and telecommunication pipes and somehow ignored water pipes. We see this as a huge opportunity because we know the water and gas pipe market. Of course, they will need to get specific approvals. It's going to take some time.
But there are a lot of areas where we see room for improvement. Half of the increase in the budget comes from what you call core business, let's say, non-M&A business. But this increase comes mostly from the new investment in stretch film or Opal brand and also Piping Business Installation business in general. We expect, again, to have four good quarters as opposed to only two good quarters and two, say, underwhelming quarters as we did last year. So these are the sources of growth.
For this year, we have budgeted a normal trend of the raw materials and prices, basically. Overall, throughout this year, we expect them to be in line with last year. We feel that versus the record levels of 2022, the prices have deflated throughout 2023. Raw material prices have deflated throughout 2023, and now we are on what we could call normal prices.
I would not say that leverage keeps me up at night because leverage, if you look at it at face value, four point something, you would say it's a little bit above, let's say, market standards. But this has nothing to do with the level of debt itself. It has more to do with the fact that there are still improvements, a lot of improvements that we can make at EBITDA level with the new acquisitions. And again, EBITDA levels of this year account only half a year for the major acquisition of Wolfgang Freiler Group, not the whole year. So I would say that the leverage does not keep me up at night.
I'm more concerned, let's say, on how to take advantage of as much as possible of Freiler's distribution network and as soon as possible in order to accelerate the growth and the expansion of the distribution of our products outside of Romania in order to have a more balanced portfolio of products and markets. Because one of the strategic drivers behind this regional expansion is to reduce dependency on the Romanian infrastructure market, which is a very good market, but it tends to be moody. It has some years that are very good and some years that are not that good. And this impacts the overall P&L of the group. And I would like to see a much more, let's say, flatter fluctuation. And the diversification of markets, hopefully, will give us this possibility.
Also, regarding volumes, I was wondering, can you comment a bit what your expectations are when it comes to organic growth and also what you expect coming from M&A? Sorry, I can hear myself back. My ears are not very clear. If you can comment a bit regarding volumes and what your base is forecast on, basically.
Sorry. We forecasted a little bit north of 100,000 tons of volumes. And out of this, a little bit below, around 15,000 tons come from the subsidiaries, and the rest comes from the current or, let's say, existing or I don't know how you call it. We would call it the old TeraPlast.
So 15,000 from the acquisition, if I heard correctly.
Yes, yes, yes. Yes. 15,000.
And for your organic growth, so you're basically looking at 85 versus 75 last year, right, in tons?
Yes. Yes.
Okay. And rather flatish prices.
No, I was just wondering how you looked at the 2024 budget. I was just looking for a bit more color. And regarding packaging, I see there's quite an increase in packaging as well. And I was wondering if you can talk a bit about what the key growth drivers for 2024, basically, when it comes to packaging, when it comes also to installations.
Well, for packaging? Sorry?
Excluding M&A. That's all I wanted to say. Just that excluding M&A as a part of growth.
No, no. I mean, M&A is not impacting packaging. Packaging will grow because of the stretch film production, which we started late last year. That's the main driver for growth. We actually budgeted for a decrease in blown film capacities as we are going to reshuffle a little bit the organization, and we will stop producing on ineffective production capacities in Bistrița-Năsăud for packaging.
But this will be, of course, more than offset by the addition of the stretch film. So that would be not the only driver of growth in the flexible packaging.
And regarding stretch film, I mean, you had some problems ramping up production in packaging, and I mean, sales, not production. And I was wondering, is it not a risk also for the stretch films?
Can you say again, please?
You had some problems ramping up sales in plastics before. And I was wondering, can this be an issue for 2024 for stretch film?
Well, I think that we learn to do things better. And I think that the stretch film is going to be a whole different story versus the packaging that we have produced until last year.
Regarding the installation, because there's the other business that is going to grow, we see that last year ended in a good trend, which we expect to continue and to see that trend throughout this year. Therefore, again, we feel that the installation is on a good path. Let's not beat it around the bush. It's an election year. Local authorities, especially in the rural areas, are interested to have new installations of water networks, sewage networks. Election years tended to be good years in terms of infrastructure works.
Regarding compounds?
In compounds, last year was exceptionally underwhelming. We expect to see a slight recovery this year.
For packaging, do you already have signed contracts?
You mean for stretch films? Let's talk in the call for the first quarter.
Okay. Thank you.
We see that the stretch film we see that the stretch film is way easier business, way easier business. And again, it's not what it's in the business plan, but it's what's going on since we started this one. Way easier business than the other packaging because here we are talking about standard product, which is, let's say, off-the-shelf product, not a custom product like in the case of the other shopping bags and what we do in TeraBio Pack. It's much closer in terms of business model to what we see in pipes. And on these levels, we feel it's a way more accessible product than, again, in TeraBio Pack products. Edge in the industry and whether it's hard or not to replicate. We have invested EUR 80 million in new production capacities in Bistrița.
I can tell you that there are very few companies worldwide that have production lines as advanced as we have. It's not hard to replicate, but it's capital-intensive. And what we see is somehow a decrease in appetite of larger players, multinational players for Europe. Probably they are focused in other areas. And we feel that this presents us, which are, I would say, let's say, not at all humbly. We are more dynamic than they are. And I think this gives us an edge in this part of Europe. And also, we have the opportunity or the contact that large players are losing their focus on Europe in general and Eastern Europe in particular.
I think that these two factors, we need to capitalize in the long run and use as a springboard the distribution or the trading relations that Wolfgang Freiler Group has in order to promote our products in our advantage. In the long run, I would say size is going to be our main advantage because, again, we are mostly focused on commodities. And size is an advantage in itself because it gives you bargaining power with the suppliers. And again, one or two or three percentage points in the margin makes a huge difference.
And size has another distinct advantage, the fact that you can dedicate various production lines, reduce changeover times, and increase overall efficiency by having critical size. All this resulting in lower costs, which at the end of the day is the name of the game in the commodity business. Any other questions, please?
Is there room in the businesses that you're acquiring? Is there significant room to grow capacity?
Without companies? I'm not sure if there is enough real estate to put more lines or if they have low capacity utilization.
Low capacity utilization.
Sorry, another question.
Their capacity utilization in pipes is higher than the group average, but there is still room for improvement.
Okay. No, I was more wondering what comes next. So I mean, we're seeing the budget for 2024. And I was wondering, yes, 2025, you'll see additional growth coming from full consolidation of these businesses. But I was wondering what comes next. I mean, what's the achievable growth going forward? What sort of growth rate are we looking at? That's why I was.
I think that we will publish some plans after the closing and before the general assembly in order to give a clearer picture on how we see things going forward, especially on the acquisition side. What we want to develop, we want to expand the product range manufactured locally in order to offset logistic disadvantages that we are having by transporting small-diameter pipes from Bistrița to, I don't know, Western Hungary, Austria, Czech Republic, Croatia. And especially in low-diameter pipes, the logistic cost is punishing, and it's eroding our competitiveness.
However, if we localize production there for this type of pipes, some of them they already produce, some of them not, we'll be able to increase turnover as well as profitability. And also, to piggyback, so to speak, on those products, the large-diameter pipes, which are more logistical-friendly, so to speak, can be transported from Bistrița throughout Europe.
I also see that their EBITDA margin is higher than what you generate right now from installations. So do you see a boost in the EBITDA margin coming from that as well, from the integration?
Okay. This is, let's say, a little bit tricky. Of course, there is going to be one, but it's marginal because they are so much smaller than we are. So when we put their EBITDA margin and our EBITDA margin, we account for some logistical increase in efficiency. Of course, we'll see an improvement in EBITDA, but not only from that. I mean, we need to work harder to increase efficiency in Bistrița as well in order to reach 12%+ EBITDA margin.
Thank you. And do you see room for further improvement efficiency in Bistrița? I don't think you're budgeting significant improvements for 2024. But I was wondering what you see going forward.
Yes, we see room for improvement. We still need to reach critical mass on some of our production line. And the plan that we are going to present for the general assembly, I think, will shed a little bit more light. The name of the game is increase capacity utilization and overall equipment efficiency. And there will be some more data available sometime at the end of March available for the general assembly in April.
Thank you. Thank you very much.
Thank you. Any other questions? Hey, thank you very much for your time. And I wait to see you in give or take three months' time for the first quarter results. And don't forget that we have a general assembly for the approval of the Freiler transaction.
Have a nice afternoon, and we'll be in touch through our channel, through our investigations department, and if anything else comes up through our regular communication. Thank you very much.
Thank you. Have a nice afternoon.
You too. Bye-bye.
Bye.